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An Essay on the

Nature of Commerce

Richard Cantillon

* A New English Translation *

Translated by Chantal Saucier

Edited by Mark Thornton

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An Essay on the Nature of Commerce

Richard Cantillon

Translated by Chantal Saucier

Edited by Mark Thornton

Table of Contents

Introduction by Chantal Saucier and Mark Thornton

Part One: Production, Distribution, and Consumption

Chapter One: Of Wealth

Chapter Two: Of Human Societies

Chapter Three: Of Villages

Chapter Four: Of Market Towns

Chapter Five: Of Cities

Chapter Six: Of Capital Cities

Chapter Seven: The Labor of the Plowman is of less

Value than that of the Artisan

Chapter Eight: Some Artisans earn more, others less,

according to the different Cases and

Circumstances

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Chapter Nine: The Number of Laborers, Artisans and

others, who work in a State is naturally

proportioned to the Demand for them

Chapter Ten: The Price and Intrinsic Value of a Thing

in general is the measure of the Land

and Labor which enter into its

Production

Chapter Eleven: Of the Par or Relation between the Value

of Land and Labor

Chapter Twelve: All Classes and Individuals in a State

subsist or are enriched at the Expense

of the Proprietors of Land

Chapter Thirteen: The Circulation and Exchange of Goods

and Merchandise as well as their

Production are carried on in Europe by

Entrepreneurs, and at a risk

Chapter Fourteen: The Desires, Fashions, and the Ways of

Life of the Prince, and especially of

the Property Owners, determine the Use

to which Land is put in a State and

Cause the Variations in the Market

Prices of all Things

Chapter Fifteen: The Increase and Decrease of the Number

of People in a State chiefly Depends on

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the Taste, the Fashions, and the Ways of

Life Property Owners

Chapter Sixteen: The more Labor there is in a State the

more the State is judged naturally rich

Chapter Seventeen: Of Metals and Money, and especially of

Gold and Silver

Part Two: Money and Interest

Chapter One: Of Barter

Chapter Two: Of Market Prices

Chapter Three: Of the Circulation of Money

Chapter Four: Further Reflection on the Rapidity or

Slowness of the Circulation of Money in

Exchange

Chapter Five: Of the inequality of the circulation of

hard money in a State

Chapter Six: Of the increase and decrease in the

quantity of hard money in a State

Chapter Seven: Continuation of the same subject

Chapter Eight: Further Reflection on the same subject

Chapter Nine: Of the Interest of Money and its Causes

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Chapter Ten: Of the Causes of the Increase and

Decrease of the Interest of Money in a

State

Part Three: International Trade and Business Cycles

Chapter One: Of Foreign Trade

Chapter Two: Of the Exchanges and their Nature

Chapter Three: Further explanations of the nature of

the Exchanges

Chapter Four: Of the variations in the proportion of

values with regard to the Metals which

serve as Money

Chapter Five: Of the augmentation and diminution of

coin in denomination

Chapter Six: Of Banks and their Credit

Chapter Seven: Further explanations and enquiries as to

the utility of a National Bank

Chapter Eight: Of the Refinements of Credit of General

Banks

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Part One: Production, Distribution, and Consumption

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Chapter One: On Wealth

Abstract: Cantillon defines wealth as the

consumption goods produced by land and labor. This

contrasted with the mercantilists who thought

money was wealth.

Land is the source or matter from which all wealth is drawn;

man’s labor provides the form for its production, and wealth

in itself is nothing but the food, conveniences, and

pleasures of life.

Land produces grass, roots, grain, flax, cotton, hemp,

shrubs and several kinds of trees, with fruits, bark, and

foliage like that of the mulberry tree for silkworms, and it

supplies mines and minerals. From these, the labor of man

creates wealth.

Rivers and seas provide fish for the food of man, and

many other things for his enjoyment. But these seas and

rivers belong to the adjacent lands or are common to all,

and man’s labor extracts fish and other advantages from

them.

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Chapter Two: Of Human Societies

Abstract: All human societies are based on a

system of property rights. The distribution of

rights will necessarily be unequal, and the use to

which property is put will be dependent on the

tastes of the owners.

Whichever way a society of men is formed, the ownership of

the land they inhabit will necessarily belong to a small

number among them.

In nomadic societies like the Tartar hordes1 and Indian

tribes, who go from one place to another with their animals

and families, the king or leader must fix the boundaries for

households and neighborhoods around the camp. Otherwise,

there would always be disputes over living quarters or

access to life’s conveniences such as forests, pastures,

water, etc. However, when the districts and boundaries are

settled for all, it is as good as ownership while they stay

in that place.

In the more settled societies, if a prince at the head

of an army has conquered a country, he will distribute the

1 The Mongols, who under leaders such as Genghis Khan captured territories from the Pacific Ocean to

Poland and from Russia to the Middle East and India and established the Mongol Empire, the largest

contigous empire in world history during the 13th

and 14th

centuries.

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lands among his officers or friends according to their merit

or his pleasure (as was originally the case in France). He

will then establish laws to maintain property rights for

them and their descendants, or he will reserve the ownership

of the land to himself and employ his officers or friends to

cultivate it. He also may grant the land to them on

condition that they pay an annual royalty or rent, or he may

grant it to them while reserving the right to tax them every

year according to his needs and their capacity. In all these

cases, the officers or friends, whether independent owners

or dependents, whether administrators or supervisors of the

production of the land, will be few in number compared to

all the inhabitants.

Even if the prince distributes the land equally among

all the inhabitants, it will ultimately be divided among a

small number. One man will have several children and will

not be able to leave each of them a portion of land equal to

his own. Another will die without children, and will leave

his portion to someone who has land already, rather than to

one who has none. A third will be lazy, extravagant, or

sickly, and be obliged to sell his portion to someone more

frugal and industrious, who will continually add to his

estate by new purchases on which he will employ the labor of

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those, who having no land of their own, are obliged to offer

him their labor in order to subsist.

At the first settlement of Rome, each citizen was given

two units of land.2 Yet, soon after, there was as great an

inequality among inheritances as what we observe today in

all the countries of Europe. The land eventually was divided

among a few owners.

Assuming then that the lands of a new country belong to

a small number of people, each owner will manage his land

himself, or lease it to one or more farmers. In this

economy, it is essential that the farmers and laborers

should have a living, whether the land is exploited by the

owner or by the farmers. The owner receives the surplus of

the land; and he will give part of it to the prince or the

government, or the farmers will give this part directly to

the prince on behalf of the owner.

As for the use to which the land should be put, the

first necessity is to employ part of it for the maintenance

and food of those who work the land and make it productive.

The rest depends mainly upon the desires and lifestyle of

the prince, the lords of the State, and the property owner.

If they are fond of wine, vineyards must be cultivated; if

2 Cantillon wrote that each person received two “journaux,” which is approximately two acres of land.

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they are fond of silks, mulberry trees must be planted and

silkworms raised. Moreover, part of the land must be

employed to support those who supply these wants; if they

delight in horses, pastures are needed, and so on.

However, if we assume that the lands belong to no one

in particular, it is difficult to conceive how a society of

men can be formed there. We see, for example, that for the

communal lands of a village, there is a fixed number of

animals that each of the inhabitants are allowed to

maintain, and if the land were left to the first occupier in

a new conquest or discovery of a country, the establishment

of ownership would inevitably have to based on some rule in

order for a society to be establish, whether the rule is

determined by force or by law.

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Chapter Three: Of Villages

Abstract: In this first of four chapters on

economic geography and location theory, Cantillon

explains that settlements are based on the

requirements of production, especially the

quantity of labor, and the extent of the

specialization and division of labor.

However the land is used, whether pasture, wheat, vineyards,

etc., the farmers or laborers who carry on the work must

live nearby. Otherwise the time spent going to their fields

and returning to their houses would consume too much of the

day. Hence the necessity for villages widespread in all the

countryside and cultivated lands, where there also must be

enough blacksmiths and wagon makers for the tools, ploughs,

and carts that are needed, especially when the village is

far from the towns. The size of a village is naturally

proportioned to the number of inhabitants the land requires

for daily work, and to the artisans who find enough

employment there by serving the farmers and laborers.

However, these artisans are not quite so necessary in the

vicinity of towns where the laborers can travel without much

loss of time.

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If one or more of the property owners reside in the

village, the number of inhabitants will be greater in

proportion to the domestic servants and artisans attracted

there, and inns will be established for the convenience of

the domestic servants and workmen who earn a living from the

property owners.

If the land is only suitable for maintaining sheep, as

in the sandy districts and moorlands, the villages will be

fewer and smaller because only a few shepherds are required

on the land.

If the land consists of sandy soil where only trees

grow and there is no grass for livestock, and it is distant

from towns and rivers, the trees will be useless for

consumption. As in many areas of Germany, there will only be

as many houses and villages as are needed to gather acorns

and feed pigs in season. And, if the land is sterile, there

will be no villages or inhabitants.

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Chapter Four: Of Market Towns

Abstract: Entrepreneurs establish markets in

centrally-located villages which provide the

necessary conditions under which prices are

established between supply and demand. The size of

the market town depends on the size of the economy

it serves.

There are villages where markets have been established by

the interest of some property owner or royal resident. These

markets, held once or twice a week, encourage several little

entrepreneurs3 and merchants to establish themselves there.

In the market, they buy the products brought from the

surrounding villages in order to transport them to the large

towns for sale. In the large towns, they exchange them for

iron, salt, sugar and other merchandise, which they sell on

market days to the villagers. Many small artisans, like

locksmiths, cabinetmakers and others, also settle down in

these places to serve the villagers, and, as a result, these

villages become market towns. A market town being located in

the center of the villages whose people come to the market,

3 It was long believed that J.B. Say had introduced the term entrepreneur to economics, but Cantillon was

the first to employ the term extensively in economic analysis.

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it is natural and easier for the villagers to bring their

products for sale on market days and to buy the articles

they need, than it would be for the merchants and

entrepreneurs to transport the merchandise to the villages

and exchange them for the villagers’ products.

1. For the merchants to go around the villages would

unnecessarily increase the cost of transportation.

2. The merchants would perhaps be obliged to go to several

villages before finding the quality and quantity of

products that they wish to buy.

3. The villagers would generally be in their fields when

the merchants arrived and, not knowing what products

the merchants desired, they would have nothing prepared

and ready for sale.

4. It would be almost impossible to fix the price of the

products and the merchandise in the villages, between

the merchants and the villagers. In one village, the

merchant would refuse the price asked for the products,

hoping to find it cheaper in another village, and the

villager would refuse the price offered for his

merchandise in the hope that another merchant would

come along and take it on better terms.

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All these difficulties are avoided when the villagers

come to town on market days to sell their products and buy

the things they need. Prices are fixed by the proportion

between the products displayed for sale and the money

offered for it; this takes place in the same spot, under the

eyes of all the villagers of different villages and of the

merchants or entrepreneurs of the town. When the price has

been settled between a few, the others follow without

difficulty and so the market price of the day is determined.

The peasant then goes back to his village and resumes his

work.

The size of the market town is naturally proportioned4

to the number of farmers and laborers needed to cultivate

the lands dependent on it, and to the number of artisans and

small merchants that the villages bordering on the market

town employ with their assistants and horses. Finally, it

also depends on the number of persons supported by the

property owners who live in the town.

When the villages associated with a market town (i.e.

those who ordinarily sell their products in a particular

market town) are sizeable and have a large output, the

4 Notice Cantillon‟s use of the phrase “naturally proportional.” He uses the word proportion

throughout the book when he is explaining naturally equilibrating or harmonious human processes

that are self-regulating, especially economic processes, not in the sense of exact ratios and

percentages.

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market town will become considerable and large in

proportion. However, when the neighboring villages have

little production, the market town also is poor and

insignificant.

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Chapter Five: Of Cities

Abstract: Cities form at sites where large

property owners have decided to live.

Specialization of labor expands to meet the

demands of the wealthy. Cities grow even larger

when manufacturing industries produce for export,

and whose workers are essentially supported by the

production of foreign lands. Cantillon placed a

great deal of emphasis on transportation costs. He

found that property owners who lived far from

their lands would experience a reduction in income

proportional to the cost of transporting their

production to market.

The property owners who only have small estates usually

reside in market towns and villages near their lands and

farmers. The transportation of their production to distant

cities would not enable them to live there comfortably.

However, property owners that own several large estates,

have the means to live at a distance from them and enjoy a

pleasant society with other property owners and nobility of

the same species.

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If a prince or noble, who has received large grants of

land at the time of a conquest or discovery of a country,

fixes his residence in some pleasant spot, and several other

lords come to live there to be within reach of each other

and to enjoy a pleasant society, this place will become a

city. Great houses will be built for the nobility in

question, and many more will be built for the merchants,

artisans, and people of all sorts of professions who will be

attracted there. These noblemen will require bakers,

butchers, brewers, wine merchants, and manufacturers of all

kinds to service their needs. These entrepreneurs will, in

turn, build houses in this location or will rent houses

built by other entrepreneurs. There is no great nobleman

whose expense upon his house, his retinue and servants, does

not maintain merchants and artisans of all kinds, as may be

seen from the detailed calculations that I had made for the

supplement of this essay.5

All these artisans and entrepreneurs serve each other,

as well as the nobility. The fact that their upkeep

ultimately falls on property owners and nobles is often

overlooked. It is not perceived that all the little houses

in a city, such as we have described, depend upon and

subsist at the expense of the great houses. However, it will

5 This is the first mention of the supplement which has been lost.

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be shown later that all the classes and inhabitants of a

state live at the expense of the property owners.6 The city

in question will grow larger if the king, or the government,

establishes law courts to which the people of the market

towns and villages of the province must have recourse. An

increased number of entrepreneurs and artisans of every sort

will be needed for the maintenance of the judges and

lawyers.

If in this same city workshops and factories are

established to manufacture beyond home consumption, for

export and sale abroad, the city will be large in proportion

to the workmen and artisans who live there at the expense of

foreigners.

However, if we put aside these considerations, in order

to not complicate our subject, we may say that the gathering

of several rich property owners living in the same place

suffices to form what is called a city. Many cities in

Europe, mainly in the interior, owe the number of their

inhabitants to this assemblage. In this case, the size of a

city is naturally proportioned to the number of property

owners living there, or rather to the production of the land

which belongs to them, minus the cost of transportation to

6 Briefly put, all food and raw materials our produced on the land controlled by property owners. Property

owners sustain farmers and laborers as well as artisans and manufacturing workers to the extent that raw

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those whose lands are the furthest removed, and the part

that they are obliged to give to the king or the government,

which is usually consumed in the capital.

materials are worked into fine goods. If the owners live in cities far from their lands, they also must support

those (and their horses) who transport the products to the city.

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Chapter Six: Of Capital Cities

Abstract: Wherever a government establishes its

capital, the city will grow in size because the

additional spending attracts labor and businesses

to service the government and its employees and

thus, it becomes a commercial center for the

nation as well.

A capital city is formed in the same way as a provincial

city, with these differences: the largest property owners in

the state reside in the capital; the king or supreme

government is established in it and spends the government’s

revenues there; the supreme courts of justice are located

there; it is the center of the fashions, which all the

provinces take as their model; and the property owners, who

reside in the provinces, occasionally spend time in the

capital, and they send their children there to be educated.

Therefore, all the lands in the state contribute, more or

less, to maintain those who dwell in the capital.

If a sovereign leader leaves a city to establish

residence in another, nobles will follow him and locate

their residence with him in the new city, which will become

great and important at the expense of the first. We have

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seen a recent example of this in the city of Petersburg to

the disadvantage of Moscow,7 and one sees many old cities,

which were important, fall into ruin and others spring from

their ashes. Great cities usually are built on the seacoast

or on the banks of large rivers for the convenience of

transportation. Water transportation of the products and

merchandise necessary for the subsistence and comfort of the

inhabitants is much cheaper than wagons and land

transportation.8

7 Tsar Peter the Great moved the capital of Russia to Petersburg in 1713.

8 Notice that Cantillon again mentions the importance of transportation costs. Four-wheel wagons were

developed in 12th

century but were mostly used by the wealthy until the late 18th

century.

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Chapter Seven: The Labor of the Plowman is of Less Value

than that of the Artisan

Abstract: The opportunity cost of becoming a

skilled worker includes both the direct expenses

as well as the foregone labor during the training

period or apprenticeship. As a result, skilled

workers must be paid higher wages than unskilled

workers.

A laborer's son, at seven to twelve years of age, begins to

help his father either in keeping the herds, digging the

ground, or in other sorts of country labor that require no

art or skill.

If his father has him taught a trade, he loses his

assistance during the time of his apprenticeship and is

obligated to clothe him and to pay the expenses of his

apprenticeship for many years.9 The son is thus dependent on

his father and his labor brings in no advantage for several

years. The [working] life of man is estimated at only 10 or

12 years, and as several are lost in learning a trade, most

9 This is where Cantillon explains the opportunity cost of an apprenticeship (similar to the opportunity cost

of college) where the father has to pay for the apprenticeship (college tuition) and loses the child‟s labor for

several years (lost wages). Cantillon includes the cost of clothing (which would not apply in the case of

college) because children who work on the farm help make their own clothing, but children in

apprenticeships do not (See Part 1, Chapter 9, paragraph 3).

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of which in England require seven years of apprenticeship, a

plowman would never be willing to have a trade taught to his

son if the artisans did not earn more than the plowmen.

Therefore, those who employ artisans or professionals

must pay for their labor at a higher rate than for that of a

plowman or common laborer. Their labor will necessarily be

expensive in proportion to the time lost in learning the

trade, and the cost and risk incurred in becoming

proficient.

The professionals themselves do not make all their

children learn their own trade: there would be too many of

them for the needs of a city or a state and many would not

find enough work. However, the work is naturally better paid

than that of plowmen.

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Chapter Eight: Some Artisans Earn More, Others Less,

According to the Different Cases and Circumstances

Abstract: In addition to training and the forces

of supply and demand, workers with higher quality

skills, risky jobs, or jobs which require

trustworthy employees will receive higher wages.

This is now known as the theory of compensating

differentials that is often attributed to Adam

Smith.

If two tailors make all the clothes of a village, one may

have more customers than the other, whether from his way of

attracting business, because his products are better or more

durable than the other, or because he follows the fashions

better in the style of his garments.

If one dies, the other, finding himself with more work,

will be able to raise the price of his labor, expediting the

work of some in preference to others, until the villagers

find it to their advantage to have their clothes made in

another village, town or city, losing the time spent in

going and returning, or until another tailor comes to live

in their village and shares the business.

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The jobs which require the most time in training or

most ingenuity and industry must necessarily be the best

paid. A skillful cabinetmaker must receive a higher price

for his work than an ordinary carpenter, and a good clock

and watchmaker more than a blacksmith.

The arts and occupations, which are accompanied by

risks and dangers, like those of foundry workers, sailors,

silver miners, etc. ought to be paid in proportion to the

risks. When skill is needed, over and above the dangers,

they ought to be paid even more, such as ship pilots,

divers, engineers, etc. When capacity and trustworthiness

are needed, the labor is paid still more highly, as in the

case of jewelers, bookkeepers, cashiers, and others.

By these examples, and a hundred others we could draw

from ordinary experience, it is easily seen that the

differences in the prices paid for labor is based upon

natural and obvious reasons.

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Chapter Nine: The Number of Laborers, Artisans, and Others,

Who Work in a State, is Naturally Proportioned to the Demand

for Them

Abstract: The supply of workers adjusts itself to

the demand for labor, across all professions, via

wage rates, migration, and changes in population.

Prosperity cannot be created by subsidizing job

training.

If all the farm laborers in a village raise several sons to

the same work, there will be too many farm laborers to

cultivate the lands of the village, and the surplus adults

will have to leave in order to seek a livelihood elsewhere,

which they generally find in cities. If some remain with

their fathers—as they will not all find sufficient

employment—they will live in great poverty and will not

marry for lack of means to raise children. If they do marry,

their children will soon die of starvation, with their

parents, as we see every day in France.

Therefore, if the village continues in the same

employment pattern, and derives its living from cultivating

the same area of land, its population will not increase in a

thousand years.

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It is true that the women and girls of this village

can, when they are not working in the fields, occupy

themselves in spinning, knitting or other work that can be

sold in the cities. However, this rarely suffices to support

the extra children, who leave the village to seek their

fortune elsewhere.

The same may be said of the artisans of a village. If a

tailor makes all the clothes for the villagers and then

raises three sons to the same job, there will only be enough

work for one successor to him and the other two must seek

their livelihood elsewhere. If they do not find employment

in the neighboring town, they must move further away or

change their occupations and earn a living by becoming

servants, soldiers, sailors, etc.

By the same process of reasoning, it is easy to

conceive that the laborers, artisans, and others, who earn

their living by working, must proportion themselves in

number to the employment and demand for them in market towns

and cities.

If four tailors are enough to make all the clothes for

a town and a fifth arrives, he may find some work at the

expense of the other four. Therefore, if the labor is

divided between the five tailors, neither of them will have

enough work, and each one will live more poorly.

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It often happens that laborers and artisans do not have

enough employment when there are too many of them to share

the business. It also happens that they can be deprived of

work by accidents and by variations in demand, or that they

are overburdened with work, according to the circumstances.

Be that as it may, when they have no work, they leave the

villages, towns or cities where they live in such numbers

and those who remain are always proportioned to the

employment that suffices to maintain them. When there is a

continuous increase of work, there are gains to be made and

others will move in to share the business.

From this, it is easy to understand that the charity

schools in England, and the proposals in France, to increase

the number of artisans, are useless. If the King of France

sent 100,000 of his subjects, at his expense, into Holland

to learn seafaring, they would be of no use when they

returned if no more vessels were sent to sea than before. It

is true that it would be a great advantage for a state to

teach its subjects to produce the manufactured goods that

are customarily drawn from abroad, and all the other

articles bought there, but I am, at present, only

considering a state in relation to itself.10

10

It should be remembered that in Cantillon‟s time, France was suffering under an economic policy of

severe mercantilism where all manufacturing was highly restricted, monopolized, heavily taxed, and

closely regulated. Therefore manufactured goods, primarily textiles, were sold at high prices and this

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As the artisans earn more than the laborers, they are

better able to raise their children into professions, and

there will never be a lack of artisans in a state when there

is enough work for their constant employment.11

encouraged imports. Cantillon found that subsidizing training was both expensive and unnecessary in a free

economy because skilled labor would be supplied if there was a demand as he stated in the following

paragraph. 11

Cantillon will emphasis throughout the Essai that manufacturing should be allowed to grow to its largest

natural extent because manufacturing labor earns higher wages (as he explained in Part 1 Chapter 7) and

therefore has a higher standard of living.

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Chapter ten: The Price and Intrinsic Value of a Thing, in

General, is the Measurement of the Land and Labor, which

enter into its Production

Abstract: The intrinsic value can be measured by

the quantity of land and laborers, taking into

account the quality of land and labor. Some goods

are produced almost entirely with land, others

solely from labor. In the garden example,

intrinsic value is both the direct expenses of the

garden and the foregone value of land. Intrinsic

value of a choice never changes, but market prices

vary according to demand. Cantillon construction

of “intrinsic value” should therefore be

understood as the concept of opportunity cost, not

the essential nature of a thing.

One acre12 of land produces more wheat, or feeds more sheep,

than another. The work of one man is more expensive than

that of another, as I have already explained, according to

superior skill and circumstances of the time. If two acres

of land are of equal quality, one will feed as many sheep

12

Cantillon used the word arpent. In France, from the 16th

to 18th

centuries, the “arpent de Paris” was a unit

of land , which is equal to 0.84 acres.

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and produce as much wool as the other, assuming the labor to

be the same. In addition, the wool produced by one acre will

be the same, and will sell at the same price, as that

produced by the other.

If the wool of the one acre is made into a suit of

coarse cloth, and the wool of the other into a suit of fine

cloth, the latter will require more work and more expensive

workmanship, and it will sometimes be ten times more

expensive, though both contain the same quantity and quality

of wool. The quantity of the production of the land, and the

quantity as well as the quality of the labor, will

necessarily enter into the price.

A pound of flax processed into fine Brussels’ lace

requires the labor of 14 persons for a year, or of one

person for 14 years, as may be seen in the Supplement from a

calculation of the different processes. We also see that the

price obtained for the lace is sufficient to pay for the

maintenance of one person for 14 years, as well as the

profits of all the entrepreneurs and merchants concerned.

The refined steel spring, which regulates an English

watch, is generally sold at a price that makes the

proportion of material to labor, or of steel to spring, one

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34

to one million.13 In this case, labor makes up nearly all

the value of the spring. See the calculation in the

Supplement.

On the other hand, the price of hay in a field, on the

spot,14 or of trees we wish to cut down, is regulated by the

material production of the land, according to its quality.

The price for taking a jug of water from the Seine

River is nothing, because there is an immense supply, which

does not dry up. However, in the streets of Paris, people

give a sol15 for it, which is the price, or measure, for the

labor of the water carrier.

By these examples and inductions, I believe it will be

understood that the price, or intrinsic value of a thing, is

the measurement of the quantity of land and of labor

entering into its production, having regard to the fertility

or productivity of the land, and to the quality of the

labor.

But it often happens that many things, which actually

have a certain intrinsic value, are not sold in the market

13

The original French edition has “one to one,” but this is considered a scrivener‟s or printer‟s error. The

actual ratio has been estimated several times and “one to one million” is considered the likely or

approximate ratio calculated by Cantillon. 14

Cantillon wrote "rendu sur les lieux" which means, "once on site." Higgs‟s "on the spot" is not perfectly

clear, but Cantillon is clearly writing about hay that is being sold as it stands in the field and whether the

buyer must harvest the hay or is allowed to graze his animals in the field is less clear. 15

A silver, and later copper coin in France.

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35

according to that value: that will depend on the desires and

moods of men, and on their consumption.

If a gentleman digs ditches and raises terraces in his

garden,16 their intrinsic value will be proportional to the

land and labor; but the price, in reality, will not always

follow this proportion. If he offers to sell the garden, it

is possible that no one will give him half the expense he

has incurred. It is also possible that if several persons

desire it, he may be given double the intrinsic value; that

is twice the value of the land and the expense he has

incurred.

If the farmers in a state sow more wheat than usual

(i.e., much more than they should for the year's

consumption), the real and intrinsic value of the wheat will

correspond to the land and labor, which enter into its

production. However, as there is too great an abundance of

it, and there are more sellers than buyers, the market price

of the wheat will necessarily fall below the price or

intrinsic value. If, on the contrary, the farmers sow less

wheat than is needed for consumption, there will be more

16

It was a common practice in 18th

century gardening to raise the level of the garden, delineated by a

retaining wall and then a dry ditch which would keep grazing animals out of the garden without the use of a

fence which might hinder the view. Higgs translated “Si un Seigneur coupe des canaux & éleve des

terrasses dans son Jardin” as “If a gentleman cuts canals and erects terraces in his garden.” Here, Cantillon

seems to be commenting on the value of home improvements.

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36

buyers than sellers, and the market price of wheat will rise

above its intrinsic value.

There is never variation in the intrinsic value of

things, but the impossibility of proportioning the

production of goods and products in a state, to their

consumption, causes a daily variation, and a perpetual ebb

and flow in market prices. However, in well-ordered

societies,17 the market prices of commodities and

merchandise, whose consumption is relatively constant and

uniform, do not vary much from the intrinsic value. In

addition, in years when production is not too meager or too

abundant, the city officials are even able to fix the market

prices of many things, like bread and meat, without anyone

having cause to complain.

Land provides the matter, and labor the form, of all

commodities and merchandise, and as those who work must

subsist on the production of the land, it seems that some

par value or ratio between labor and the production of the

land might be found. This will form the subject of the next

chapter.

17

Cantillon used the phrase “les Sociétés bien réglées” or well-regulated societies. That phrase conjures up

images of a government regulated economy and Cantillon was obviously speaking of the natural order of

the market economy. In the same paragraph he disparages government price controls by noting that the

market works so well that government officials can even fix prices without people complaining.

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37

Chapter eleven: Of the Par Value or Ratio between the Value

of Land and Labor

William Petty set off the search for a par value

between land and labor. Cantillon provides a

theoretical answer (referenced in Adam Smith’s

Wealth of Nations) that property owners must

provide their labor with the production of at

least twice the land necessary to sustain the

worker in order that enough children are raised to

maintain the workforce over time. The amount of

land will actually vary from job to job, person to

person, and among different countries and

societies. Therefore, the practical circumstances

of the world dictate that there is no such “par”

value between land and labor, only money—a “most

certain measure”—be used for income measurements

and comparisons.

It does not appear that Providence gave the right of land

possession to one man over another. The most ancient titles

are founded on violence and conquest. The lands of Mexico

belong today to the Spaniards and those of Jerusalem to the

Turks. But however people come to the ownership and

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38

possession of land, we already have observed that it always

falls into the hands of a small number of people compared to

the total number of inhabitants.

If the owner of a great estate manages it himself, he

will employ slaves or free men to work upon it. If he has

many slaves, he must have supervisors to make them work. He

must likewise have slave artisans to supply goods and life’s

pleasures for himself and his workers, and must have skills

taught to others in order to carry on the work.

In this economy, he must provide his laboring slaves

their subsistence and wherewithal to raise their children.

The supervisors must receive advantages proportional to the

confidence and authority that they possess. The slaves, who

are being taught a craft, must be maintained without any

return during the time of their apprenticeship. In addition,

the artisan slaves and their supervisors, who should be

competent in the crafts, must have a better subsistence than

the laboring slaves, etc., because the loss of an artisan

would be greater than that of a laborer, and more care must

be taken of him given the expense of training another to

take his place.

On this assumption, the labor of an adult slave of the

lowest class is worth at least as much as the quantity of

land that the owner is obliged to allot for his food and

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39

necessities, and also to double the land which serves to

raise a child until he is of age or fit for labor. Knowing

that half of the children born die before the age of 17,

according to the calculations and observations of the

celebrated Dr. Halley18, two children must be reared in

order to maintain one of them until working age, and it

seems that even this would not be enough to ensure a

continuance of the labor force because adult men die at all

ages.

It is true that the one half of the children who die

before 17, more die in the first years after birth than in

the following years, with at least one-third dying in their

first year. This seems to diminish the cost of raising a

child to working age. However, as the mothers lose much time

in nursing their children in illness and infancy, and the

daughters, even when grown up, are not the equals of the

males in work and barely earn their living, it seems that to

maintain one of two children to manhood or working age, as

much land must be employed as for the subsistence of an

adult slave. This is true whether the owner raises the

18

This is no doubt Dr. Edmond Halley (1656-1742) the famous astronomer who predicted in 1705 that a

comet would appear in 1758 based on Newton‟s laws of motion and comet sighting in the years 1531,

1607, and 1682. The comet did indeed return as predicted and was later named in his honor. Dr. Halley is

also credited with the publication of Newton‟s groundbreaking Principia Mathematica because he paid the

publication‟s expenses and corrected the proofs of the book that otherwise might not have been published.

Dr. Halley contributed to Issac Newton‟s Universal arithmetick, or, A treatise of arithmetical composition

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40

children himself in his house or has them raised there, or

if the slave father brings them up in a house or hamlet

apart. Therefore, I conclude that the daily labor of the

lowest slave corresponds in value to double the produce of

the land required to maintain him, whether the owner gives

it to him for his subsistence and that of his family,19 or

provides him and his family subsistence in his own house.

This matter does not allow for an exact calculation, and

exactitude is not very necessary; it suffices to be near

enough to the truth.

If the owner employs the labor of vassals20 or free

peasants, he will probably maintain them better than slaves,

according to the custom of the place where he lives. Yet, in

this case, the work of a free laborer also ought to

correspond in value to double the product of land needed for

his maintenance. However, it will always be more profitable

for the owner to maintain slaves than to maintain free

peasants, because when he has raised too many slaves for his

requirements, he can sell the surplus, as he does his

cattle, and obtain for them a price proportionate to what he

and resolution: To which is added, Dr. Halley's method of finding the roots of aequations arithmetically

(1720). 19

In the Higgs edition (pp. 345-6), the French version of this section is italized, but the English version is

not. Apparently in the original manuscript only the first two words are underlined. This conclusion is

noteworthy because it is a conclusion that Adam Smith attributed to Cantillon in the Wealth of Nations. 20

Someone bonded to the land of a feudal landowner who would provide protection in exchange for the

alligience of the vassal.

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41

has spent in rearing them to manhood or working age, except

in cases of old age or infirmity.21

In the same way, one may appraise the labor of slave

artisans at twice the production of the land that they

consume and that of supervisors likewise, because of the

favors and privileges given to them above those who work

under them.

When the artisans or laborers have their double portion

at their own disposal, they employ one part of it for their

own upkeep, and if they are married, the other for their

children.

If they are unmarried, they set aside a little of their

double portion to enable them to marry and to save a little

for the household, however, most of them will consume the

double portion for their own maintenance.

For example, the married laborer will be satisfied to

live on bread, cheese, vegetables, etc., will rarely eat

meat, will drink little wine or beer, and will have only old

and shabby clothes, which he will wear for as long as he

can. The surplus of his double portion will be used to raise

21

Cantillon reaches the same conclusion as Fogel and Engerman (1974) did two hundred and forty four

years later. Cantillon found that slave labor was more profitable than free labor because the slave owner

can sell off any excess supply of labor and recoup his cost, while a landowner dependent of free labor can

only dismiss the labor and is unable to recoup his costs of rearing free labor. Fogel and Engerman base

their argument on empirical calculations and attribute profits to exploitation. Although both discuss

supervision and the loss of runaway slaves, neither consider the cost of policing a slave labor force which is

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42

and maintain his children. On the other hand, the unmarried

laborer will eat meat as often as he can, will buy himself

new clothes, etc. and use his double portion on his own

maintenance. Thus, he will personally consume twice as much

of the produce of the land as the married man.

I do not here take into account the expense of the

wife. I assume that her labor barely suffices to pay for her

own living, and when one sees a large number of little

children in one of these poor families, I assume that

charitable persons contribute something to their

maintenance. Otherwise, the parents must deprive themselves

of some of their necessities to provide for their children.

To better understand this, it is to be observed that a

poor laborer may maintain himself, at the lowest estimate,

upon the produce of an acre and a half of land, if he lives

on bread and vegetables, wears hemp garments, wooden shoes,

etc. However, if he can allow himself wine, meat, woolen

clothes, etc. he may, without drunkenness or gluttony, or

excess of any kind, consume the product of four to ten acres

of land of average quality, such as the case with most of

the land in Europe. I had some calculations made, which will

be found in the Supplement, in order to determine the yearly

the major difference between supervising a free and slave labor force and which greatly undermines the

profitability of slave labor.

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43

amount of land which one man can consume the product of

under each category of food, clothing, and other necessaries

of life, according to the ways of life found in Europe,

where peasants in different countries often are nourished

and maintained very differently.

This is why I did not determine how much land

corresponds in value to the work of the cheapest peasant or

laborer when I wrote that it was worth double the product of

the land used to maintain him because that varies according

the ways of life in different countries. In some southern

provinces of France, the peasant maintains himself on the

product of one acre and a half of land, and the value of his

labor may be reckoned equal to the product of three acres.

But in the county of Middlesex, the peasant usually consumes

the product of five to eight acres of land and his labor may

be valued at twice as much.

In the country of the Iroquois,22 where the inhabitants

do not plow the land and live entirely by hunting, the

common hunter may consume the product of fifty acres of

land, since it probably requires this amount to maintain the

animals he eats in one year, especially as these savages

have not the industry to grow grass by cutting down some

22

The six native American tribes of Northern and Western New York State lived under a Constitutional

confederacy called the Iroquois nation.

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44

trees, but leave everything to nature.23 The labor of this

hunter may then be reckoned equal in value to the product of

one hundred acres of land.24

In the southern provinces of China, the land yields up

to three crops of rice per year, and can bring in, each

time, up to a hundred times as much as is sown. This is

because of the great care they take with agriculture and the

fertility of the soil, which is never fallow. The peasants,

who work almost naked, live only on rice and drink only rice

water and it appears that one acre can support more than ten

peasants. It is not surprising, therefore, to see

extraordinary population numbers. In any case, it seems from

these examples that nature is altogether indifferent whether

land produces grass, trees, or grain, or maintains a large

or small number of vegetables, animals, or men.

Farmers in Europe seem to correspond to supervisors of

laboring slaves in other countries, and the master artisans,

who employ several journeymen artisans, to the supervisors

of artisan slaves.

23

In the original french version the paragraph ends here. In the Higgs translation he combines the

paragraphs. The natural paragraph break would include the next sentence (as we have done) and start the

next paragraph (which discusses China) with the the sentence that follows. This is possible evidence that

the french edition was made from a copy of the original manuscript. 24

This “nation” consisted of the Iroquois, Mohawk, Oneida, Onondaga, Cayuga and Tuscarora tribes of

western New York and surrounding areas of Pennsylvania and Canada. They actually did practice some

agriculture and are reported to have used the technique of burning down areas of forest lands to increase the

quantity of grass available for the animals that they hunted. They are also known to have used second

growth trees (those that grow after forest fires) to build the structures they lived in called longhouses. In

addition, the Iroquois nation had a very advanced form of constitutional government.

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These master artisans know approximately how much work

a journeyman artisan can do in a day in each craft, and

often pay them in proportion to the work they do, so that

the journeymen work as hard as they can, in their own

interest, without further supervision.

As the farmers and master artisans in Europe are all

entrepreneurs working at risk, some get rich and gain more

than double their subsistence, others are ruined and become

bankrupt, as will be explained more in detail in the

analysis of entrepreneurs [Part 1 Chapter 13]. However, the

majority supports themselves and their families from day to

day, and their labor or supervision may be valued at

approximately three times the product of the land that

serves for their maintenance.

Evidently, these farmers and master artisans, if they

are supervising the labor of ten laborers or journeymen

artisans, would be equally capable of supervising the labor

of twenty, according to the size of their farms or the

number of their customers. This renders uncertain the value

of their labor or supervision.

By these examples, and others of the same sort that

could be added, it is seen that the value of the day's work

has a relation to the product of the soil. The intrinsic

value of any thing may be measured by the quantity of land

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46

used in its production and the quantity of labor which

enters into it, that is to say, by the quantity of land of

which the product is allotted to the laborers. As all the

land belongs to the prince and the property owners, all

things that have this intrinsic value, have it only at their

expense.

The money or coin, which finds the proportion of values

in exchange, is the most certain measure for judging of the

par between land and labor and the ratio of one to the other

in different countries. This par varies according to the

greater or less produce of the land allotted to those who

labor.25

If, for example, one man earns an ounce of silver every

day by his work, and another in the same place earns only

half an ounce, one can conclude that the first has twice the

amount of the production of the land to spend as the second.

Sir William Petty26, in a little manuscript of the year

1685, considers this par or equation between land and labor

as the most important consideration in political arithmetic.

25

This paragraph is italicized in the French version of the Higgs edition, but not in the English version. It

was not underlined in Mirabeau‟s copy of the manuscript. However, it is a noteworthy point in the chapter. 26

William Petty (1623-1687) was an English statistician and political economist, but also was a scientist,

inventor, and entrepreneur. He is mostly known for his survey of Ireland and one of his most famous books

was the one Cantillon alludes to here, Treatise of Taxes and Contributions (1662, 1667 and 1685) although

Petty also discusses „par‟ in The Political Anatomy of Ireland (1691) and declared it the “most important

consideration of political economy.” Cantillon was obviously influenced by Petty, but mostly in the subject

matter, not method or conclusions, because Cantillon is distinctly hostile to Petty throughout. It is

interesting to note that Petty amassed a huge estate in Kerry County, Ireland (and throughout Ireland), the

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47

However, the research he made in passing is fanciful and

remote from natural laws because he has attached himself,

not to causes and principles, but only to effects, as Mr.

Locke27, Mr. Davenant

28, and all the other English authors

who have written on this subject, have done after him.

same County in which the Cantillon family lost its estates. See Aspromourgos (1996) for a detailed analysis

of Petty and Cantillon on the subject of par value. 27

John Locke (1632-1704), English philosopher whose economic works include Some Considerations on

the Consequence of Lowering the Rate of Interest and Raising the Value of Money (1691), Short

Observations on a printed paper entitled, For encouraging the Coining of Silver Money in England, and

after for Keeping it here (1695), and Further Considerations concerning Raising the Value of Money

(1695). 28

Charles Davenant (1656-1714), English economist, lawyer, member of Parliament who was

Commissioner of the Excise (tax) from 1683 to 1689 and Inspector general of Exports and Imports from

1705 until his death in 1714. His important publications include An Essay on the East India Trade (1697),

Two Discourses on the Public Revenues and Trade of England (1698), An Essay on the probable means of

making the people the gainers in the balance of Trade (1699), and A Discourse on Grants and Resumptions

and Essays on the Balance of Power (1701).

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Chapter twelve: All Classes and Individuals in a State

Subsist or Grow Rich at the Expense of the Property Owners

Cantillon develops a circular-flow model of the

economy that shows the distribution of farm

production between property owners, farmers, and

workers. Farm production is exchanged for the

goods and services produced in the cities by

entrepreneurs and artisans. While the property

owners are “independent,” the model demonstrates

the mutual interdependence between all the classes

of people that Smith dubbed the “invisible hand”

in The Theory of Moral Sentiments (1759).

There are none but the prince and the property owners who

live independent; all other classes and inhabitants are

hired or are entrepreneurs. The proof and detail of this

will be developed in the next chapter.

If the prince and property owners close their estates

and will not allow them to be cultivated, it is clear that

there would neither be food nor clothing for any of the

inhabitants of the state. Consequently, all the individuals

of the state are supported, not only by the product of the

land that is cultivated for the benefit of the owners, but

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49

also at the expense of these same owners from whose property

they derive all that they have.

The farmers generally have two thirds of the product of

the land: one for their expenses and the maintenance of

their assistants, the other for the profit of their

enterprise. On these two thirds, the farmer generally

provides, directly or indirectly, subsistence for all those

who live in the country, and also for artisans or

entrepreneurs in the city, because of the goods from the

city that are consumed in the countryside.

The owner usually has one third of the product of his

land, and on this third, he maintains all the artisans and

others, whom he employs in the city as well. This often

includes those who bring the goods from the countryside to

the city.

[Insert Cantillon’s Three Rents Diagram here]

It is generally assumed that one-half of the

inhabitants of a state subsist and reside in cities, and the

other half live in the country. That being the case, the

farmer, who has two-thirds or four-sixth of the product of

the land, pays directly or indirectly one-sixth to the city

residents in exchange for the goods he acquires from them.

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50

This sixth, with the one-third or two-sixths that the owner

spends in the city, makes three-sixths or one-half of the

products of the land. This calculation is only to convey a

general idea of the proportion; but in fact, if half of the

inhabitants live in the cities, they consume more than half

of the land's product. They live better than those who

reside in the countryside and consume more of the production

of the land because all artisans and dependents of the

property owners are better maintained than the assistants

and dependents of the farmers.

In any event, if we examine the means by which an

inhabitant is supported, one will always find, when going

back to the source, that their income comes from the owner’s

land, either in the two-thirds of the product reserved by

the farmer, or the one-third that remains with the owner.

[Insert Cantillon’s Circular Flow Diagram]

If a property owner only had enough land for one

farmer, the farmer would get a better living out of it than

the owner would. However, the nobles and large property

owners in the cities sometimes have several hundred farmers

and thus there are very few owners in proportion to all the

inhabitants of the state.

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51

It is true, that there are often several entrepreneurs

and artisans in the large cities who live by foreign trade,

and therefore, at the expense of foreign landowners. But at

present, I am only considering a state with regard to its

production and with its own industry, in order to avoid

cluttering my argument with accidental circumstances.29

The land belongs to the owners but would be useless to

them if it were not cultivated. The more labor is expended

on it, other things being equal,30 the more it produces; and

the more its products are refined, other things being equal,

the more value they have as goods. Therefore, the owners

need the inhabitants as they need the owners.31 However, in

this economy, it is the property owners who have the control

and direction of the landed capital, to give the most

advantageous turn and movement to the whole. Also,

everything in a state depends mainly on the moods, modes and

ways of life of the property owners, as I will try to

clearly show in the remainder of this essay.

Thus, need and necessity enable farmers, artisans of

every kind, merchants, officers, soldiers, sailors, domestic

servants and all the other classes who work or are employed

in the state, to exist. All these working people serve not

29

Here Cantillon employs the “closed economy” assumption, or condition, for his model. 30

Here Cantillon employs ceteris paribus conditions to his model.

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52

only the prince and the property owners, but each other as

well. Many of them do not work directly for the property

owners, and so it is not seen that they subsist on the

capital of these proprietors and live at their expense. As

for those whose professions are not essential, like dancers,

actors, painters, musicians, etc. they are only supported in

the state for pleasure or ornamentation, and their number is

always very small compared to the population.

31

This mutual dependance between the wealthy property owners and labor is what Adam Smith refers to as

the invisible hand in The Theory of Moral Sentiments.

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53

Cantillon’s Three Rents

Property Owner receives 1/3 of Production in Rent

Or

Lender receives 1/3 of Production in Interest

Or

Farmer retains 1/3 of Production in Profit

Farmer retains 1/3 of Production as Income

Labor receives 1/3 of Production as Wages

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Cantillon’s Circular Flow Economy

Property Owners

Farmers Entrepreneurs

Land

Rent

Goods

Commodities

Artisans Labor

Goods

Commodities

Work

Wages

Goods

Profits

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Chapter thirteen: The Circulation and Exchange of Goods and

Merchandise, as well as their Production, are Carried On in

Europe by Entrepreneurs, and at a Risk.

Abstract: Here Cantillon introduces, for the first

time, the theory of entrepreneurship.

Entrepreneurs are the prime directors of

resources. Their occupations come with risks due

to uncertainty, especially from competition and

changing tastes. As a result, their income can be

very large, but they also face the prospect of

bankruptcy. The property owner is independent in

having a large income (rent) from the land and the

capitalist, or large money owner, also can live

independent on interest. Everyone else is

ultimately dependent on the expenditures of

property owners for their livelihoods.

The farmer is an entrepreneur who promises to pay the

property owner, for his farm or land, a fixed sum of money

(generally assumed to be equal in value to a third of the

production) without assurance of the profit he will derive

from this enterprise. He employs part of the land to feed

herds, produce grain, wine, hay, etc. according to his

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56

judgment, without being able to foresee which of these will

pay the best price. The price of these products will depend

partly on the weather, partly on the demand; if wheat is

abundant compared to consumption, it will sell at a cheap

price, if there is scarcity, it will be expensive. Who can

predict the number of births or deaths that will occur

during the current year? Who can foresee the increase or

reduction in expenditures that can occur in families? And

yet the price of the farmer's product naturally depends upon

these unforeseen circumstances, and consequently, he

conducts the enterprise of his farm with uncertainty.

The city consumes more than half of the farmer's

products. He carries it to the market or sells it in the

market of the nearest town, or perhaps to entrepreneurs who

provide the transport. They obligate themselves to pay the

farmer a fixed price for his products—the market price of

the day—to receive an uncertain price in the city, which

should nonetheless defray the cost of transport and leave

them a profit. However, the daily variation in the price of

products in the city, though not considerable, makes their

profit uncertain.

The entrepreneur or merchant, who transports the

products of the countryside to the city, cannot stay there

to sell them retail until the products are consumed. No

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family in a city will burden itself with the purchase of the

products it may need over time all at once because each

family is susceptible to increase or decrease in size and

consumption, or at least to variation in the choice of

products it will consume. Wine is almost the only article of

consumption stocked by families. In any case, the majority

of citizens live from day to day, and even the largest

consumers will not be able to stock away products from the

countryside.

For this reason, many people set up as merchants or

entrepreneurs in the city, to buy the country products from

those who bring it or to have it brought on their account.

They pay a fixed price for them at the place where they are

purchased, to resell wholesale or retail at an uncertain

price.

Such entrepreneurs are the wholesalers of wool and

grain, and the bakers, butchers, manufacturers and merchants

of all kinds, who buy country production and materials to

work them up and resell them gradually as the inhabitants

require them for consumption.

These entrepreneurs never know how great the demand

will be in their city, nor how long their customers will buy

from them since their rivals will try, by all sorts of

means, to attract their customers. All this causes so much

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uncertainty among these entrepreneurs that every day one

sees some of them go bankrupt.

The manufacturer, who has bought wool from the merchant

or directly from the farmer, cannot know the profit he will

make in selling his cloths and fabrics to the tailor. If the

latter does not have reasonable sales, he will not burden

himself with the cloths and fabrics of the manufacturer,

especially if those fabrics have gone out of fashion.

The draper or clothier is an entrepreneur who buys

cloths and fabrics from the manufacturer at a certain price

in order to sell them again at an uncertain price, because

he cannot foresee the extent of the demand. He can, of

course, fix a price and abstain from selling unless he gets

it. However, if his customers leave him to buy cheaper from

another, he will be consumed by expenses while waiting to

sell at the price he demands, and that will ruin him as

soon, or sooner, than if he sold without profit.

Shopkeepers and retailers of every kind are

entrepreneurs who buy at a certain price and sell in their

shops or the markets at an uncertain price. What encourages

and maintains these entrepreneurs in a state is the fact

that the consumers, who are their customers, prefer paying a

little more to get what they want promptly and in small

quantities, rather than having to stock up. In addition,

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most of them do not have the means to stock up by buying

from wholesalers.

All these entrepreneurs become consumers and customers

of each other, the draper of the wine merchant, and vice

versa. In a state, they proportion themselves to the

customers or their consumption. If there are too many hat

makers in a city or on a street for the number of people who

buy hats, the least patronized must go bankrupt. On the

other hand, if there are too few, it will be a profitable

business, which will encourage new hat makers to open shops

and in this manner, entrepreneurs of all kinds adjust

themselves to risks in a state.

All the other entrepreneurs, like those who take charge

of mines, theaters, buildings, the traders by sea and land,

restaurateurs, pastry cooks, innkeepers, etc., as well as

the entrepreneurs of their own labor who need no capital to

establish themselves, like journeymen artisans,

coppersmiths, seamstresses, chimney sweeps, water

transporters, live with uncertainty and proportion

themselves to their customers. Master craftsmen like

shoemakers, tailors, carpenters, wigmakers, etc., who employ

journeymen according to the work they have, live with the

same uncertainty since their customers may leave them any

day. The entrepreneurs of their own labor in art and

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science, like painters, physicians, lawyers, etc. live in

the same uncertainty. If one attorney or lawyer earns 5,000

livres sterling per year in the service of his clients or in

his practice, and another earns only 500, their income is

just as uncertain as those that employ them.

It may perhaps be urged that entrepreneurs seek to

snatch all they can in their calling and to get the better

of their customers, but this is outside my subject.32

By all these inductions, and an infinity of others that

could be made to extend this matter to the entire population

of the state, it may be established that, except for the

prince and the property owners, all the inhabitants of a

state are dependent. They can be divided into two classes,

entrepreneurs and hired workers. The entrepreneurs are on

unfixed wages while the others are on fixed wages as long as

there is work, although their functions and ranks may be

very unequal. The general who has his pay, the courtier33

his pension and the domestic servant who has wages, all fall

into this last class. All the others are entrepreneurs,

whether they are set up with capital to conduct their

enterprise, or are entrepreneurs of their own labor without

capital, and they may be regarded as living under

32

Here Cantillon avoids the normative and subjective issue of which person gains more in exchange, the

buyer or seller. 33

Someone from the royal family, royal court, or royal appointment.

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uncertainty; even the beggars and the robbers are

entrepreneurs of this class. Finally all the inhabitants of

a state derive their living and their advantages from the

property of the landowners and are dependent.

It is true, however, that if some person on high wages

or some large entrepreneur has saved capital or wealth (that

is if he has reserves of wheat, wool, copper, gold, silver

or some commodity or merchandise in constant use or

circulation in a state having an intrinsic or a real value)

he may be justly considered independent as long as the

capital lasts. He may exchange it to acquire a mortgage, and

receive income from the land and from public loans secured

upon the land. He may even live better than the small

landowners and buy property from some of them.

But commodities and merchandise, even gold and silver,

are much more subject to accident and loss than the

ownership of land. And however one may have earned or saved

them, they are always derived from the land of actual

owners, either by wages or by the saving of wages destined

for one's subsistence.

The number of money owners34 in a large state is often

quite considerable. Though the value of all the money that

circulates in the state barely exceeds the ninth or tenth

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part of the value of the production drawn from the soil,

because the proprietors of money lend considerable amounts

for which they receive interest either by a mortgage on land

or the commodities and merchandise of the state, the sums

due to them usually exceed all the money in the state. They

often become so powerful a body that they could, in certain

cases, rival the property owners if the owners were not

often also money owners, and if the owners of large sums of

money did not also seek to become property owners

themselves.

Nevertheless, it is always true that all the sums

earned or saved have been drawn from the land of the current

owners. However, because so many property owners in a state

ruin themselves daily, and those who acquire the property

take their place, the independence given by the ownership of

land applies only to those who keep possession of it. As all

land always has a master or current owner, it is from their

property that all the inhabitants of the state derive their

living and all their wealth. If these owners confined

themselves to living within their rental income, this would

be beyond question, and in that case, it would be much more

difficult for the other inhabitants to grow rich at their

expense.

34

The term capitalist had not been coined when Cantillon wrote the Essai.

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I will therefore establish as a principle that the

property owners alone are naturally independent in a state;

all the other classes are dependent, whether entrepreneurs

or hired, and that all the exchange and circulation of the

state is conducted by the actions of these entrepreneurs.

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Chapter Fourteen: The Desires, Fashions, and Ways of Life of

the Prince, and especially of the Property Owners, Determine

the Use to which Land is put in a State, and Cause the

Variations in the Market Prices of all Things

Cantillon constructs a model of the isolated

estate or closed economy where the choices of

property owners determine outputs and prices,

regardless if they manage the isolated estate or

lease it to farmers. Mistakes of the farmers or

changes in demand by the property owners cause

changes in prices, profits and losses, which drive

the economy back to equilibrium. The result is

that the price system directs resources to the

same outcome as that provided by the direct

management of the estate owner, ala Adam Smith’s

use of the “invisible hand” in the Wealth of

Nations.

If the owner of a large estate (that I wish to consider here

as if there were no other in the world)35 cultivated it

himself, he will follow his desires in the uses he puts it

to. (1) He will necessarily use part of it for grain to feed

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the laborers, artisans and supervisors who work for him, and

another part to feed the cattle, sheep and other animals

necessary for their clothing and food or other conveniences,

according to the way in which he wishes to maintain them.

(2) He will turn part of the land into parks, gardens, fruit

trees or vines according to his inclinations, and into

meadows for the horses he will use for his pleasure, etc.

Let us now assume that to avoid all the care and

trouble, he makes a deal with the supervisors of the

laborers, gives them farms or pieces of land, and leaves to

them the responsibility for maintaining, in the usual

manner, all the laborers they supervise. The supervisors,

now farmers or entrepreneurs, give the laborers, for working

on the land or farm, another third of the production for

their food, clothing and other requirements, such as they

had when the owner employed them. Assume further that the

owner makes a deal with the supervisors of the artisans for

the food and other conveniences that he gave them, that he

makes the supervisors become master artisans, fixes a common

measure, like silver, to settle the price at which the

farmers will supply them with wool, and they will supply him

with cloth, and that the prices give the master craftsmen

the same advantages and enjoyments they had when they were

35

Closed economy assumption invoked here.

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supervisors, and maintain the journeymen artisans the same

as before. The artisans’ work will be paid for by the day or

by the piece, and the merchandise they have made, hats,

stockings, shoes, clothes, etc. will be sold to the property

owner, farmers, laborers, and other artisans reciprocally,

at a prices that leaves all of them with the same advantages

as before. The farmers will sell, at a proportionate price,

their produce and raw material.

It will then come to pass that the supervisors, now

entrepreneurs, will become the absolute masters of those who

work under them, and they will have more care and

satisfaction in working on their own account. We assume that

after this change, all the people on this large estate live

just as they did before, and all the portions and farms of

this great estate will be put to the same use as they

formerly were.

If some of the farmers sowed more grain than usual,

they will feed fewer sheep and have less wool and mutton to

sell. Consequently, there will be too much grain and too

little wool for the consumption of the inhabitants. Wool

will be expensive, which will force the inhabitants to wear

their clothes longer than usual, and there will be too much

grain and a surplus for the following year. And as we assume

that the property owner has stipulated for the payment in

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silver for the third of the production of the farm that is

owed to him, the farmers who have too much grain and too

little wool, will not be able to pay him the rent. If he

excuses them, they will plan to have less grain and more

wool for the next year, for farmers always take care to use

their land for the production of those things, which they

think will fetch the best price at market.36 If, however,

next year they have too much wool and too little grain for

the demand, they will not fail to change from year to year

the use of the land, until they arrive at proportioning

their production to the consumption of the inhabitants. Thus

a farmer who has appropriately proportioned his output to

consumption will have part of his farm in grass, for hay,

another for grain, wool and so on, and he will not change

his plan unless he sees some considerable change in demand.

However, in this example, we have assumed that all the

people live approximately in the same way as when the

property owner cultivated the land for himself, and

consequently, the farmers will employ the land for the same

purposes as before.

The owner, who has one-third of the product of the land

at his disposal, is the principal agent in the changes that

36

Cantillon model of the isolated estate where the direction of resources is transferred from the estate

owner to a number of entrepreneurs is probably the basis of Adam Smith use of the invisible hand in the

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may occur in demand. Laborers and artisans, who live from

day to day, change their way of living only out of

necessity. However, some well-to-do farmers, master artisans

and other entrepreneurs, whose expenses and compensations

vary, will always take as their models the nobility and

property owners. They imitate them in their clothing, meals,

and way of life. If the property owners like to wear fine

linen, silk, or lace, the demand for these goods will be

greater than that of the owners themselves.

If a noble or property owner, who has leased out all

his lands to farm, decides to considerably change his way of

life; if, for example, he decreases the number of his

domestic servants and increases the number of his horses,

not only will his servants be forced to leave the estate in

question, but also a proportionate number of artisans and of

laborers who worked to maintain them. The portion of land

that was used to maintain these inhabitants will be turned

into pasture for the new horses, and if all landowners in

the state did the same, they would soon increase the number

of horses and diminish the number of inhabitants.

When a property owner has dismissed a great number of

domestic servants, and increased the number of his horses,

Wealth of Nations. Here is a clear statement of how self interest drives consumer sovereignty in the market

economy.

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69

there will be too much wheat for the needs of the

inhabitants, and so the wheat will be cheap and hay

expensive. That will make the farmers enlarge their pastures

and decrease wheat production to proportion production with

consumption. Thus the demands of the owners determine the

use of the land and when they bring about the variations in

demand, this causes variations of market prices. If all the

property owners of a state cultivated their own estates,

they would use them to produce what they wanted. As the

variations of demand are chiefly caused by their way of

living, the prices that they offer in the market determine,

for the farmers, all the changes that they make in the

employment and use of the land.37

I do not consider here the variations in market prices,

which may arise from the good or bad harvest of the year, or

the extraordinary consumption, which may occur from foreign

troops or other accidents. In order to not complicate my

subject, I am considering only a state in its natural and

uniform condition.38

37

Here again Cantillon is showing how the market economy transmits the demands of consumers and

directs the allocation of resources and the production of goods ala the invisible hand. 38

More simplifying assumptions (or ceteris paribus conditions) regarding weather, crop production, war,

and other conditions.

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Chapter Fifteen: The Increase and Decrease of the Number of

People in a State, chiefly Depends on the Taste, the

Fashions, and the Ways of Life of the Property Owners

Abstract: Population is based on the tastes and

choices of property owners. Early versions of the

Malthusian approach to population growth—that it

follows some mathematical formula—are criticized.

This chapter also shows that the opulence and

lavish spending of the prince and absentee

landlords living far from their lands was

responsible for the poverty and declining

population of France, which ultimately led to the

French Revolution.

Experience shows that trees, plants and other kinds of

vegetation can be increased to any quantity, to the extent

that the land allocated to them can support.

The same experience shows that all the animal species

can be multiplied to any quantity, which the land allotted

to them can support. Horses, cattle, sheep can easily be

multiplied up to the number that the land will support. One

can even improve the fields allocated for this purpose by

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irrigation, as in Milan.39 Hay can be grown to raise cattle

in stables and feed them in larger numbers than if they were

allowed to freely roam in the fields. Sheep may be fed on

turnips, as in England, so that more can be fed with an acre

of land than if it were pasture.

In a word, we can multiply all sorts of animals in such

numbers as we wish to maintain, even to infinite numbers if

we could find lands in infinite quantity to nourish them;

and the multiplication of animals has no other bounds than

the greater or lesser means allotted for their subsistence.

There is no doubt that if all land was devoted to the simple

sustenance of man, the race would increase up to the number

that the land would support in the manner to be explained.

There is no country where population is carried to a

greater height than in China. The common people are

supported by rice and rice water; they work almost naked and

in the southern provinces, and they have three plentiful

harvests of rice each year, thanks to the great care they

give to agriculture. The land is never fallow and yields

more than a hundredfold every year.40 Those who wear clothes

generally have cotton clothing, which needs so little land

for its production that an acre of land, it seems, is

39

Here Cantillon notes that technology in the form of irrigation increases the productivity of resources. He

has been critized for ignoring the role of technolical progress. 40

Yields more than one hundred times the amount of seed that is planted.

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capable of producing a quantity of clothing sufficient for

500 adults. The Chinese, by the principles of their

religion, are obliged to marry, and raise as many children

as their means of subsistence will afford. They look upon it

as a crime to use land for pleasure gardens or parks,

defrauding the public of food. They transport travelers in

sedan chairs, and save the work of horses upon all tasks,

which men can perform. Their number is incredible, according

to the descriptions of China’s visitors,41 however, they are

forced to let many of their children die in the cradle, when

they are unable to support them, keeping only the number

they can feed. By hard and persistent labor, they draw from

the rivers an extraordinary quantity of fish, and from the

land, all that is possible.

Nevertheless, when bad years come, they die of hunger

by the thousands in spite of the care of the emperor, who

stores rice for such contingencies. Numerous then as the

people of China are, they are necessarily proportioned to

their means of living and do not exceed the number the

country can support, according to their standard of living;

and on this level, a single acre of land will support many

of them.

41

Higgs translated this as “Relations of Voyages” a common title of books written by travellers and

explorers of foreign lands.

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73

On the other hand, there is no country where the

increase of population is more limited than among the

savages in the interior parts of America. They neglect

agriculture, live in the forests, and live by hunting the

animals found there. As the trees consume the sap and

substance of the earth, there is little pasture for animals,

and since an Indian eats several animals in a year, 50 or

100 acres often supply only enough food for a single Indian.

A small tribe of these Indians will have 40 square

leagues42 for its hunting ground. They wage regular and

bitter wars over these boundaries, and always proportion

their numbers to their means of support from hunting.

The Europeans cultivate the land and draw grain from it

for their subsistence. The wool of their sheep provides them

with clothing. Wheat is the grain on which most of them are

fed, but some peasants make their bread of rye, and in the

north from barley and oats. The food of the peasants and the

people is not the same in all countries of Europe, and land

is often different in quality and fertility.

Most of the land in Flanders,43 and part of that in

Lombardy,44 yields eighteen to twenty times the wheat sown,

without lying idle. The countryside of Naples yields still

42

Roughly 100 square miles. 43

Now located in northern Belgium. 44

Now located in northern Italy.

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more. There are some parts of France, Spain, England and

Germany, which yield the same amount. Cicero tells us that

the land of Sicily in his time yielded tenfold, and the

elder Pliny says that the Leontine45 lands in Sicily yielded

a hundred times the seed sown, those of Babylon a hundred

and fifty times, and some African lands a good deal more.

Today, land in Europe yields on the average six times

what is sown, so that five times the seed remains for the

consumption of the people. Land usually lays fallow the

third year, producing wheat the first year and barley and

oats the second.

In the supplement there are estimates of the amount of

land required to support a man, according to the different

assumptions made about his way of living.

It will be seen there that a man who lives on bread,

garlic and roots, wears only hemp garments, coarse linen,

wooden shoes, and drinks only water, like many peasants in

the south of France, can live on the produce of an acre and

a half of land of average quality, yielding a sixfold

harvest and laying fallow every third year.

On the other hand, an adult man, who wears leather

shoes, stockings, woolen cloth, who lives in a house and has

a change of linen, a bed, chairs, table, and other

45

Leontini was a city state on the east coast of Sicily, just north of Syracuse.

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necessities, moderately drinks beer or wine, eats meat every

day, butter, cheese, bread, vegetables, etc. sufficiently

and yet moderately, needs less than the product of four to

five acres of land of average quality. It is true that in

these estimates no land is allotted for horses, except those

needed to plow and for the transport of the products a

distance of ten miles.

History records that the first Romans each maintained

his family on two journaux46 of land, equal to one Paris

acre, and approximately 330 square feet. They were almost

naked, had no wine or oil, slept in straw, and hardly had

any comforts, but because they intensely cultivated the

land, which is fairly good around Rome, they drew from it

plenty of grains and vegetables.

If the property owners had the desire to increase the

population they would encourage peasants to marry young and

raise children by promising to provide them with

subsistence, devoting the land entirely to that purpose, and

they would doubtless increase the population up to the point

that the land could support, according to the products

allotted for each person, whether those of an acre and a

half, or four to five acres.

46

Higgs did not translate Cantillon‟s journaux, but the Roman jugerum was their unit of land measurement

and is equal to approximately 2/3rds of an English acre.

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But if instead, the prince, or the property owners,

made them use the land for other purposes than the upkeep of

the people: if, by the prices they offer in the market for

commodities and merchandise, they determine that the farmers

will employ the land for other purposes than the maintenance

of men (for we have seen that the prices they offer in the

market and their consumption determine the use made of the

land, just as if they cultivated it themselves), the people

will necessarily decrease in number. Some will be forced to

leave the country for lack of employment while others, not

having the necessary means of raising children, will not

marry or will only marry late, after having saved for the

support of the household.

If the property owners who live in the country move to

the cities far away from their land, horses must be fed for

the transport of food into the city for both the owner and

all the domestic servants, artisans and others, whom their

residence in the city will attract.

The transport of wine from Burgundy to Paris often

costs more than the wine itself costs in Burgundy.

Consequently, the land employed for the upkeep of wagon

horses, and those who look after them, is more considerable

than the land that produces the wine and supports those who

have taken part in its production. The more horses there are

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in a state, the less food will remain for the people. The

upkeep of wagon, hunting, or show horses often takes three

or four acres of land each.

But when the nobility and property owners draw from

foreign manufactures their cloths, silks, laces, etc. and

pay for them by sending to the foreigner their native

products, they significantly diminish the subsistence of the

inhabitants and increase that of foreigners, who often

become enemies of the State.

If a nobleman or property owner in Poland, to whom his

farmers yearly pay a rent equal to about one third of the

product of his land, uses the cloths, linens, etc. of

Holland, he will pay, for these goods, one half of the rent

he receives, and perhaps use the other half for the

subsistence of his family, on other products and rough

manufactures of Poland. However, half his rent, on our

assumption, corresponds to one-sixth of the production of

his land, and this sixth part will be carried away by the

Dutch to whom the farmers of Poland will deliver wheat,

wool, hemp and other products. Here then is a sixth part of

the land of Poland withdrawn from its people, to say nothing

of the feeding of the wagon horses, carriage horses and show

horses maintained in Poland, because of the life style of

the nobility. Furthermore, if out of the two thirds of the

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production of the land allotted to the farmers, the latter,

imitating their masters, consume foreign manufactures that

they also pay to the foreigners in raw products of Poland,

there will be a good third of the production of the land in

Poland removed from the food of the people, and, what is

worse, mostly sent to foreigners and often serving to

support the enemies of the State. If the property owners and

the nobility in Poland would consume only the manufactures

of their own state, bad as they might be at the outset, the

products would soon become better, and it would maintain a

greater number of their own people at work, instead of

giving this advantage to foreigners. And if all states took

precautions not to be the dupes of other states in matters

of commerce, each state would be considerable only in

proportion to its products and the industry of its people.47

If the ladies of Paris enjoy wearing Brussels lace, and

if France pays for this lace with Champagne wine, the

production of a single acre of flax must be paid for with

the production of sixteen thousand acres of vineyards, if my

calculations are correct. This will be more fully explained

elsewhere and the figures are shown in the supplement.

Suffice it to say that in this transaction, a great amount

47

The long distant transportation of bulky commodies entail a reduced purchasing power for property

owners and less sustanance for the local people.

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of the production of the land is withdrawn from the

subsistence of the French, and all the products sent abroad,

unless an equally considerable amount of products is brought

back in exchange, tends to diminish the number of people in

the state.48

When I said that the property owners might multiply the

population as far as the land would support them, I assumed

that most men desire nothing better than to marry if they

are set in a position to maintain their families in the same

style as they are content to live themselves. That is, if a

man is satisfied with the production of an acre and a half

of land, he will marry if he is sure of having enough to

maintain his family in the same style. However, if he is

only satisfied with the product of five to ten acres, he

will be in no hurry to marry, unless he thinks he can

support his family in the same manner.

In Europe, the children of the nobility are brought up

in affluence; and as the largest share of the property is

usually given to the eldest sons, the younger sons are in no

hurry to marry. They usually live as bachelors, either in

the army or in the monasteries, but will seldom be found

unwilling to marry if they are offered heiresses and

48

Notice that Cantillon is not arguing over the gains from trade, but that trading necessities for luxuries has

the effect of reducing the population and recall from previous chapters that such reductions involve

poverty, starvation, and emigration.

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fortunes, or the means of supporting a family on the level

they consider appropriate and without which, they think they

will make their children unhappy.

In the lower classes of the state, there also are men

who, from pride and from reasons similar to those of the

nobility, prefer to live in celibacy and to live on the

little that they have, rather than settle down in family

life. But most of them would gladly set up a family if they

could count on supporting their family as they wish. They

would consider it an injustice to their children if they

brought them up only to fall into a lower class than

themselves. Only a few men in a state avoid marriage because

of a pure libertine spirit. All the lower classes wish to

live and raise children who can live at least like

themselves. When laborers and artisans do not marry, it is

because they wait until they save enough to enable them to

set up a household or to find some young woman who brings a

little capital for that purpose. Every day, they see others

like themselves who, for lack of such precautions, start a

family and fall into the most frightful poverty, being

obliged to deprive themselves of their own food in order to

nourish their children.

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From the observations of Mr. Halley,49 at Breslaw in

Silesia [a region in Poland], it is found that of all the

females capable of child bearing, from 16 up to 45 years of

age, not one in six actually bears a child every year.

Instead, says Mr. Halley, there ought to be at least four or

six who should have children every year, without including

those who are barren or have stillbirths. The reason why

four women out of six do not bear children every year is

that they cannot marry because of the discouragement and

difficulties in their way. A young woman takes care not to

become a mother if she is not married; she cannot marry

unless she finds a man who is ready to run the risk of it.

Most of the people in a state are hired or are

entrepreneurs; most are dependent and live in uncertainty

whether they will find by their labor or their enterprise

the means of supporting their household on an acceptable

level. Therefore, they do not all marry, or marry so late

that of six women, at least four should produce a child

every year, but there is actually only one in six who

becomes a mother.

If the property owners help to support the families, a

single generation would suffice to push the increase of

49

Edmond Halley, “An Estimate of the Degrees of the Mortality of Mankind, drawn from curious Tables of

the Births and Funerals at the City of Breslaw; with an Attempt to ascertain the Price of Annuities upon

Lives,” Philosophical Transactions, 196 (London, 1693), p.596-610.

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population as far as the production of the land will supply

the means of subsistence. Children do not require as much of

the land’s production as adults. Both can live on more or

less according to their consumption. The northern people,

where the land produces little, have been known to live on

so little production that they have sent out colonists and

swarms of men to invade the lands of the south, destroy the

inhabitants, and appropriate their land.50 According to the

different manner of living, 400,000 people might subsist on

the same products of the land, which ordinarily supports

only 100,000. A man who lives on the production of an acre

and a half of land, may be stronger and braver than one who

consumes the production of five or ten acres. Therefore, it

seems pretty clear that the number of inhabitants in a state

depends on their means of subsistence. As the means of

subsistence depend on the method of cultivating the soil,

and this method depends chiefly on the taste, desires, and

manner of living of the property owners, the increase and

decrease of population also stand on the same foundation.

The increase of population can be carried furthest in

the countries where the people are content to live the most

poorly and to consume the least production of the soil. In

countries where all the peasants and laborers are accustomed

50

Cantillon is here refering to the Vikings of Scandanvia.

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to eat meat and drink wine, beer, etc. not many inhabitants

can be supported.

Sir William Petty, and after him Mr. Davenant,

Inspector of the Customs in England, seem to depart from

nature when they try to calculate the propagation of the

race by progressive generations from Adam, the first father.

Their calculations seem to be purely imaginary and to be

drawn up at random. On the basis of what they have seen of

the actual birth rate in certain districts, how could they

explain the decrease of those innumerable people formerly

found in Asia, Egypt, etc. and even in Europe? If 17

centuries ago, there were 26 million people in Italy, now

reduced to 6 millions at most, how can it be determined by

the progressions of Mr. King that England,51 which today

contains 5 or 6 million inhabitants, will probably have 13

millions in a certain number of years? We see daily that

Englishmen, in general, consume more of the product of the

land than their fathers did, and this is the real reason why

there are fewer inhabitants than in the past.

51

This must refer to Gregory King (1648-1712) who was born at Litchfield, England. He was a painter,

engraver, printer, and mapmaker. He later became interested in “political arithmetic” and wrote Natural

and Political Observations and Conclusions upon the State and Condition of England, in 1696. Although

not published for more than a century later, Malthus refers to King‟s population statistics (of 1693) and

seems to have been influenced by them. King‟s calculations indicated that the number of births exceeded

the number of death by a ratio of 115 to 100.

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Men multiply like mice in a barn if they have unlimited

means of subsistence. The English in the colonies will

become more numerous, in proportion, in three generations

than they would in 30 in England, because in the colonies,

they cultivate new tracts of land from which they expel the

savages.52

In all countries at all times, men have waged wars for

the land and the means of subsistence. When wars have

destroyed or diminished the population of a country, the

savages and civilized nations soon repopulate it in times of

peace; especially when the prince and the property owners

lend their encouragement.

A state, which has conquered several provinces, may, by

tribute imposed on the vanquished, acquire an increase of

subsistence for its own people. The Romans drew a great part

of their subsistence from Egypt, Sicily and Africa and that

is why Italy then had so many inhabitants.

A state where mines are found, where manufactures do

not require much of the production of the land to export

their goods to foreign countries, and which receives from

them, in exchange, plentiful merchandise and commodities

from the land, provides a larger subsistence fund for its

subjects.

52

Cantillon‟s forecast is remarkably accurate.

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The Dutch exchange their labor in navigation, fishing

and manufacturing, principally with foreigners, for the

products of their land. Otherwise, Holland could not support

half of its population. England buys from abroad

considerable amounts of timber, hemp and other materials or

products of the soil and consumes much wine for which she

pays in minerals, manufactured goods, etc. That saves the

English a great quantity of the production of their soil.

Without these advantages, the people of England, based on

their standard of living, could not be as numerous as they

are. The coal mines save them several million acres of land,

which would otherwise be needed to grow timber.

But all these advantages are refinements and

exceptional cases, which I mention only incidentally. The

natural and constant way of increasing population in a state

is to find employment for the people there, and to make the

land provide their means of support.

It is also a question outside of my subject whether it

is better to have a great multitude of inhabitants, poor and

badly provided for, or a smaller number with better means; a

million who consume the product of six acres per head or

four million who live on the product of an acre and a half.

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Chapter Sixteen: The more Labor there is in a State, the

more the State is Judged Naturally Rich

Abstract: The wealth of a nation depends on

putting the labor force to work. Those who are

unnecessary for farming can be employed in making

higher quality products and manufactured goods,

particularly durable goods made from metal. Saving

is the key determinant of wealth and gold is a

particularly useful form of savings because it can

purchase all things, even in time of war. The

prince and property owners determine how people

will be employed by their consumption choices,

while the Catholic Church reduces the resources

available to materially sustain the people.

In a long calculation included in the supplement, it is

shown that the labor of 25 adults is sufficient to provide

for 100 others adults with all the necessities of life,

according to the European standard of living. In these

estimates, it is true that food, clothing, housing, etc. are

coarse and rather elementary, but there is ease and

abundance. It may be assumed that a good third of the people

in a state are too young or too old for daily work, and that

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another sixth are property owners, sick, or entrepreneurs of

different sorts, who do not, by the labor of their hands,

contribute to the different needs of men. That makes half

the people without work, or at least without the work in

question. So if 25 persons do all the work needed for the

maintenance of 100 others, there remain 25 persons out of

the 100 who are capable of working but have nothing to do.

The soldiers, and the domestic servants in well-to-do

families, will form part of these 25. And if all the others

are employed refining, by additional labor, the things

necessary for life, like making fine linen, fine cloth,

etc., the state will be judged rich in proportion to this

increase in labor, though it adds nothing to the quantity of

things needed for the subsistence and maintenance of men.

Labor gives an additional taste to food and drink. A

fork, a knife, etc. finely made, are more valuable than

those roughly and hastily made. The same may be said of a

house, a bed, a table, and everything needed for the

comforts of life.

It is true that it is of little difference in a state

whether people are accustomed to wear coarse or fine clothes

if both are equally lasting, and whether people eat nicely

or coarsely if they have enough and are in good health.

Drink, food, clothing, etc. are equally consumed, and

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whether finely or coarsely produced, this type of wealth is

not permanent.

But it is always true to say that the states where fine

cloths, fine linen, etc. are worn, and where people eat

properly and delicately, are considered rich compared to

those where these things are cruder. Furthermore, the states

where one sees more people living in the finest manner are

considered wealthier than those where one sees fewer in

proportion.

But if the 25 persons in 100 of whom we have spoken

were employed to produce durable commodities, like mining

iron, lead, tin, copper, etc. and refining them into tools

and instruments for the use of men, such as bowls, plates

and other useful objects that are much more durable than

earthenware, the state will not only appear to be richer,

but will be in reality.

It will be so, especially if these people are employed

in mining gold and silver from the earth, which are not only

durable metals, but are, so to speak, permanent. Fire itself

cannot destroy them, they are generally accepted as the

measure of value, and they can always be exchanged for any

of the necessities of life. And if these inhabitants work to

bring gold and silver in a state, in exchange for the

manufactures and work that they produce and send abroad,

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their labor will be equally useful and will in reality

improve the state.

The point that seems to determine the comparative

greatness of states is their reserve stock above the yearly

consumption, [i.e., savings] like reserves of cloth, linen,

grain, etc. to be used in times of need, or war. And as gold

and silver can always buy these things, even from the

enemies of the state, gold and silver are the true reserve

stock of a state, and the larger or smaller the actual

quantity of this stock necessarily determines the

comparative greatness of kingdoms and states.53

If it is the practice to import gold and silver from

abroad by exporting the commodities and merchandise of the

state, such as grain, wine, wool, etc., this will enrich the

state, but at the expense of a decrease in population.

However, if gold and silver are imported from abroad in

exchange for the labor of the people, such as manufactured

goods and articles which contain little of the production of

the soil, this will enrich the state in a useful and

essential manner. It is true that in a great state, the 25

persons in 100, of whom we have spoken, cannot all be

employed in making articles for foreign consumption. A

53

Notice that Cantillon does not follow the mercantilist tradition where gold in circulation is viewed as a

source of wealth. He concluded that gold as saving is a source of wealth because it can be traded for

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million men, for example, would make more clothing than

would be annually consumed in the entire commercial world.

Most people in every country are clothed with local

products, and there will seldom be found, in any state,

100,000 persons employed in making clothing for foreigners.

This is shown in the supplement with regard to England,

which, of all the nations of Europe, supplies the most cloth

to foreigners.

In order for the consumption of the manufactures of a

state to become significant in foreign countries, the goods

must be well made and highly respected by a large

consumption inside the state. This is necessary to discredit

all foreign manufactures and give plenty of employment to

the inhabitants.54

If enough employment cannot be found to occupy the 25

persons in 100 with work that is useful and profitable to

the state, I see no objection to encouraging employment

which serves only for ornament or amusement. The state is

not considered less rich for a thousand toys, which serve to

consumption goods in the future, like inventories of capital goods, and that gold has the additional

advantage of being exchangeable for goods from foreign countries in times of war, even from the enemies. 54

Higgs translated Cantillon‟s “il faut y décréditer toutes les Manufactures Etrangeres, & y donner

beaucoup d'emploi aux Habitans” as “It is needful to discourage all foreign manufacturers and to give

plenty of employment to the inhabitants.” Out of context, this is a classic mercantilist statement and Higgs

must have been expecting such statements from a writer from the mercantilist period. In context, however,

it does not make sense. Cantillon has already showed in Part 1 Chapter nine that the king cannot create jobs

via subsidized training, and here, he specifically writes that by first producing quality products that are

valued locally is the manner by which export-related manufacturing jobs are eventually created for the

inhabitants.

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entertain the ladies or even men, or are used in games and

diversions, than it is for useful and serviceable objects.

It is said that Diogenes, at the siege of Corinth, would

roll his barrel so that he might not seem idle while all

others were at work. And we have today societies of men and

women occupied in work and exercise as useless to the state

as that of Diogenes. As long as the labor of a man supplies

ornament or even amusement in a state, it is worth while to

encourage it, unless the man can find a way to employ

himself usefully.

It is always the inspiration of the property owners,

which encourages or discourages the different occupations of

the people, and the different kinds of labor that they

invent.

The example of the prince, followed by his court, is

generally capable of determining the inspiration and tastes

of the other property owners, and the example of these last

naturally influences all the lower ranks. Therefore, and

without a doubt, a prince is able, by his own example and

without any constraint, to give such a turn as he likes to

the labor of his subjects.

If each owner in a state had only a little piece of

land, like that which is usually leased to a single farmer,

there would hardly be any cities. The people would be more

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numerous and the state richer if every owner employed the

inhabitants supported on his land with some useful work.

However, when the nobles have great estates, they

necessarily bring about luxury55 and idleness. Whether an

Abbot at the head of 100 monks living on the produce of

several fine estates, or a nobleman with 50 domestic

servants and horses kept only for his service, live on these

estates, would be indifferent to the state, if it could

remain in constant peace.

But a nobleman with his retinue and his horses is

useful to the state in time of war. He can always be useful

in the judicial system and the keeping of order in the state

in peacetime. And in every case, he is a great ornament to

the country, while the monks are, as people say, neither

useful nor ornamental in peace or war, on this side of

heaven.

The convents of mendicant friars are much more

pernicious to a state than those of the closed orders. The

closed orders usually do no more harm than to occupy estates

which might serve to supply the state with officers and

judges, while the mendicants, who are themselves without

55

Here the use of the word ―luxury‖ seems harmless enough, but it will play an important role in Part Two

and Part Three. For Cantillon was not just refering to luxury goods or a high standard of living, but to what

we might refer to as decedence and opulence as practiced by the French nobility leading up to the French

Revolution. In more recent times we saw similar behavior by the leaders of Enron, WorldCom, and Teco

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useful employment, often interrupt and hinder the labor of

other people. They take from poor people in charity the

subsistence which ought to fortify them for their labor.

They cause them to lose much time in useless conversation,

not to speak of those who involve themselves in families and

those who are malicious. Experience shows that the countries

which have embraced Protestantism, and have neither monks

nor mendicants, have become visibly more powerful. They also

have the advantage of having suppressed a great number of

holy days when no work is done in Roman Catholic countries,

and which diminish the labor of the people by about an

eighth part of the year.

If a state wanted to achieve its full potential, it

might be possible, it seems to me, to diminish the number of

mendicants by incorporating them into the monasteries, as

vacancies or deaths occur. This could be done while still

providing places in the monastery for those who show little

or no aptitude in speculative sciences,56 but who are

capable of advancing the practical arts, i.e. in some area

of mathematics.57 The celibacy of churchmen is not as

Industries. Cantillon explains that political manipulations can cause macroeconomic conditions that lead to

such behavior on a large scale and ultimately to economic chaos or collaspe. 56

Cantillon seems to be referring to the theoretical sciences and philosophy. Aristotle divided the

“speculative sciences” into mathematics, physics and metaphysics. 57

In Catholic areas, monasteries owned a considerable amount of land, produced large amounts of goods,

and contributed significantly in the areas of education, innovation, invention, and practical science.

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disadvantageous as is popularly believed, as is shown in the

preceding chapter, but their idleness is very harmful.

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Chapter Seventeen: Of Metals and Money, and especially of

Gold and Silver

Abstract: Gold and silver were highly valued

before they were used as money. They hold many

advantages over other goods such as durability,

divisibility, transportability, and homogeneity.

These are the reasons which led gold, silver, and

copper to be chosen as money, not “fancy” or

common consent. When princes debase money or issue

imaginary money, they hurt the economy.

As land produces more or less grain, according to its

fertility and the labor expended on it, so does the mines of

iron, lead, tin, gold, silver, etc., produce more or less of

these metals, according to the richness of the mines and the

quantity and quality of the labor expended upon them, in

digging, draining, smelting, refining, etc. Work in silver

mines is expensive because of the mortality it causes, and

rarely does one last more than five or six years in this

work.

The real or intrinsic value of metals is, like

everything else, proportional to the land and labor that

enter into their production. The outlay on the land for this

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production is considerable only so far as the owner of the

mine can obtain a profit from the work of the miners when

the veins are unusually rich. The land needed for the

subsistence of the miners and workers, that is the mining

labor, is the principal expense and often the downfall of

the owner.

The market value of metals, as with other commodities

and merchandise, is sometimes above, sometimes below, the

intrinsic value, and varies with their abundance or

scarcity, according to demand.

If the property owners, and the lower classes in a

state who imitate them, rejected the use of tin and copper,

wrongly supposing that they are injurious to health, and if

they all used dishes and utensils of earthenware, these

metals would be at a very low price in the markets, and the

work that was carried on to extract them from the mine would

be discontinued. But as these metals are found useful, and

are employed in everyday life, they will always have a

market value corresponding to their abundance or scarcity,

and the demand for them. These metals will always be mined

in order to replace what is lost by daily use.

Iron is not only useful for daily life, but may be said

to be, in a certain way, necessary. And if the [native]

Americans, who did not make use of iron before the discovery

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of their continent, had found mines and had known how to use

it, there is little doubt that they would have labored to

produce it whatever the cost.

Gold and silver are capable of serving not only the

same purpose as tin and copper, but also most of the

purposes of lead and iron. They have this further advantage

over other metals in that they are not consumed by fire and

are so durable that they may be considered permanent. It is

not surprising, therefore, that the men who found the other

metals useful, valued gold and silver even before they were

used in exchange. The Romans prized them from the time of

the foundation of Rome and yet only used them as money five

hundred years later. Perhaps all other nations did the same

and only adopted these metals as money long after using them

for other purposes. However, we find from the oldest

historians that from time immemorial, gold and silver were

used as money in Egypt and Asia, and we learn in the Book of

Genesis that silver monies were made in the time of Abraham.

Let us assume that silver was first found in a mine of

Mount Niphates58 in Mesopotamia.

59 It is natural to think

that one or more property owners, finding this metal to be

beautiful and useful, were the first to use it, and

58

Located in modern-day Armenia, north of Iran and east of Turkey. 59

Correspond roughly to modern-day Iraq.

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willingly encouraged the miner or entrepreneur to extract

more of it from the mine, giving him, in return for his work

and that of his assistants, as much of the production of the

land as they needed for their maintenance. This metal became

more and more highly valued in Mesopotamia because as the

large landowners bought ewers60 made of silver, the lower

classes, according to their means or savings, would buy

silver cups. The entrepreneur of the mine, seeing a constant

demand for his goods, certainly placed a value proportional

to its quality or weight against the other commodities or

merchandise which he took in exchange. While everybody

looked on this metal as a precious and durable object and

strove to own a few pieces of it, the entrepreneur, who

alone could supply it, was in a position to demand in

exchange an arbitrary quantity of other commodities and

merchandise.61

Assume now that on the other side of the Tigris River,

and therefore outside Mesopotamia, a new silver mine is

discovered, of which the veins are exceptionally richer and

larger than those of Mount Niphates, and that the working of

this new mine, which was easily drained, required less labor

than that of the first.

60

Decorative water pitcher. 61

Here Cantillon describes the single seller monopolist who must choose the price rather than having it

decided in the marketplace.

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The entrepreneur of this new mine was naturally in a

position to supply silver much cheaper than the entrepreneur

of Mount Niphates. The people of Mesopotamia, who wished to

have pieces and objects of silver, would find it more

advantageous to export their merchandise and give it to the

entrepreneur of the new mine in exchange for silver, rather

than obtaining it from the original entrepreneur. The first

mine owner, finding a smaller demand, would of necessity

reduce his price; but the new entrepreneur lowering his

price in proportion would obligate the first mine owner to

stop his output. Then the price of silver, in exchange for

other commodities and merchandise would necessarily be fixed

by the price at the new mine. Silver would then cost less to

the people beyond the Tigris than to those of Mesopotamia,

who had to bear the cost of transporting their commodities

and merchandise far away to obtain silver.

It is easy to conceive that when several silver mines

were found and the property owners had developed a taste for

this metal, they were imitated by the other classes. The

pieces and fragments of silver, even when not worked up,

were sought after eagerly, because nothing was easier than

to make such articles from them as were desired, according

to their quantity and weight. As this metal was at least

valued at what it cost to produced, a few people who

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possessed some of it, finding themselves in need, could pawn

it to borrow the things they wanted, and later even sell it

outright. Hence there arose the custom of fixing its value

in proportion to its quantity or weight in exchange for all

products and merchandise. But as silver can be combined with

iron, lead, tin, copper, etc., which are more common metals

that are mined at less expense, the exchange of silver was

subject to much fraud. This caused several kingdoms to

establish mints in order to certify, by a public coinage,

the true quantity of silver that each coin contains and to

give to individuals, who bring bars or ingots of silver to

the mint, the same quantity in coins bearing a stamp or

certificate of the true quantity of silver they contain.

The costs of these certificates or coinage are

sometimes paid by the public, or by the prince. It was the

method followed in ancient times in Rome and today in

England. Sometimes, those who take silver to be coined pay

for minting, as is the custom in France.

Pure silver is hardly ever found in the mines. The

ancients did not know the art of refining it to perfection.

They always made their silver coins of fine silver, and yet,

those which remain of the Greeks, Romans, Jews and Asians,

are never perfectly pure. Today, we are more skilled: the

secret for making pure silver has been discovered. However,

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the different methods of refining it are not part of my

subject. Many authors have treated the subject, Mr.

Boizard62 among others. I will only observe that there is a

good deal of expense in refining silver and for this reason,

an ounce of fine silver is generally preferred to two

ounces, which contain one half of copper or other alloy. It

is expensive to separate the alloy and extract the ounce of

pure silver, which is in these two ounces, while by simple

smelting, any other metal can be combined with silver in any

proportion desired. When copper is sometimes used as an

alloy to fine silver, it is only to render it more malleable

and more suitable to make objects out of it. But in the

valuation of all silver, the copper or alloy is reckoned at

nothing, and only the amount of fine pure silver is

considered. For this reason, an assay is always made to

ascertain the amount of pure silver.

Assaying is merely refining a little piece of a bar of

silver, for example, to find how much pure silver it

contains and to judge the whole bar by this small sample. A

small portion of the bar, twelve grains for example, is cut

off and nicely weighed with scales that are so accurate, a

thousandth part of a grain will sometimes turn the scale.

62

Jean Boizard Traité des monoyes de leurs circonstances & dépendances (editions of 1692, 1696, 1711,

1714).

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Then the sample is refined by nitric acid or by fire, and

the copper or alloy separated. When the silver is pure, it

is weighed again in the same scale and if it then weighs

eleven grains instead of twelve, the assayer says that the

bar is eleven parts fine, i.e. it contains eleven parts of

pure silver and one of copper or alloy. This will be more

easily understood by those who have had the curiosity to see

assays carried out. There is nothing mysterious about it.

Gold is assayed in the same way, with the only difference

being that the degrees of fineness of gold are divided into

twenty-four parts called carats, since gold is more

precious; and these carats are divided into thirty-two

parts, while the degrees of fineness of silver are only

divided into twelfths, called deniers,63 and these are each

divided into twenty-four grains.

Usage has conferred upon gold and silver the term

intrinsic value, to designate and signify the quantity of

true gold or silver contained in a bar. However, in this

essay, I have always used the term intrinsic value to

signify the amount of land and labor that are entered into

production, not having found any term more suitable to

express my meaning. I mention this only to avoid

63

Deniers were also a small coin of varying composition and value in western Europe from the eighth

century to the French Revolution and represented a small value.

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misunderstanding. When the subject is not gold or silver,

the term will always apply, without any confusion.64

We have seen that the metals such as gold, silver,

iron, etc., serve several purposes and have a value

proportional to the land and labor that enter into their

production. In the second part of this essay, we will see

that because of trade, men had to use a common measure in

order to find the proportion and the value of the

commodities and merchandise they wished to exchange. The

only question is what commodity or merchandise would be most

suitable for this common measure, and whether it was

necessity, rather that choice, which has given this

preference to gold, silver and copper, which are generally

in use today for this purpose.

Ordinary products like grain, wine, meat, etc. have a

real value and serve the needs of life, but they are all

perishable and difficult to transport, and therefore, are

hardly suitable to serve as a common measure.

Goods such as cloth, linen, leather, etc. are also

perishable and cannot be subdivided without in some way

changing their value for the service of men. Like raw

produce, they cost a good deal to transport and they even

64

Cantillon used the term ―intrinsic value‖ to represent what we now know as ―opportunity cost.‖

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are expensive to store. Consequently, they are unsuitable as

a common measure.

Diamonds and other precious stones, even if they had no

intrinsic value and were demanded only by taste, would be

suitable for a common measure if they were not susceptible

to imitation and if they could be divided without loss. With

these defects, and that of being unserviceable in use, they

cannot serve as a common measure.

Iron, which is always useful and fairly durable, would

not serve badly in absence of anything better. It is

consumed by fire, and is too bulky in large quantities. It

was used from the time of Lycurgus [in Sparta] till the

Peloponnesian War; but as its value was necessarily based

intrinsically, or in proportion to the land and labor that

entered into its production, a great quantity of it was

needed for a small value. It is curious that they spoiled

the quality of the iron coins with vinegar to make them

unfit for other uses other than exchange.65 Thus, it could

only serve the austere Spartans, and they themselves could

not continue after they extended their interaction with

other countries. To ruin the Spartans, one needed only to

find rich iron mines, to make money like theirs, and use it

65

Lycurgus is thought to be the lawgiver and ruler that established the military culture of Sparta and

abolished gold and silver coins in favor of iron. Cantillon reports here that not only was iron unfit for

monetary use, but that the Spartans intentionally made the coins unfit for anything other than monetary use.

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to buy their commodities and merchandise, while they

couldn’t get anything from abroad for their spoiled iron. At

that time, they did not concern themselves with any foreign

trade, but only with war.

Lead and tin have the same disadvantage of bulk as iron

and are consumable by fire, but in case of necessity, they

would not do badly for exchange if copper was not more

suitable and durable.

Copper alone served as money to the Romans until 484

years after the founding of Rome, and in Sweden, it is still

used even for large payments. However, it is too bulky for

very considerable payments, and the Swedes themselves prefer

payment in gold or silver, rather than in copper.

In the American colonies, tobacco, sugar, and cocoa

have been used as money, but these commodities are too

bulky, perishable, and of unequal quality. Therefore, they

are hardly suitable to serve as money or as a common measure

of value.66

Gold and silver alone are of small volume, equal

quality, easily transported, divisible without loss,

convenient to keep, beautiful and brilliant articles are

made from them, and they are almost eternally durable.

Everyone who has used other articles for money returns to

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them as soon as they can get enough for exchange. It is only

in the smallest purchases that gold and silver are

unsuitable. Gold or even silver coins of the value of a

liard or a denier67 would be too small to be handled easily.

It is said that the Chinese, in small transactions, cut off

little pieces with scissors from their plates of silver, and

weigh the pieces. But since their trade with Europe, they

have begun to use copper for such occasions.

It is then not surprising that all countries managed to

use gold and silver as money or a common measure of value,

and copper for small payments. Utility and need decided for

them, and not taste or consent. Silver requires much labor

and expensive labor for its production. Silver miners are

highly paid because they rarely live more than five or six

years at this work, which causes a high mortality.

Therefore, a little silver coin corresponds to as much land

and labor as a large copper coin.

Money, or the common measure of value, must correspond

in fact and reality in terms of land and labor to the

articles exchanged for it. Otherwise it would only have an

imaginary value. For example, if a prince or a republic gave

currency in the state to something that had no real and

66

British mercantilist policies made gold and silver artificially scarce. 67

Both the liard and the denier were small French copper coins.

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intrinsic value, not only would the other states refuse to

accept it on that basis, but the inhabitants themselves

would reject it when they perceived its lack of real value.

When towards the end of the first Punic War, the Romans

wished to give their copper coin, the “as,” which weighed

two ounces, the same value as the “as” of one pound or

twelve ounces had before, it could not long be maintained in

exchange. The history of all times shows that when princes

have debased their money, keeping it at the same nominal

value, all raw commodities and merchandise have gone up in

price in proportion to the debasement of the coinage.

Mr. Locke says that the consent of mankind has given

its value to gold and silver. This cannot be doubted since

absolute necessity had no share in it. It is the same

consent that has given, and does give every day, a value to

lace, linen, fine cloths, copper, and other metals. Man

could subsist without any of these things, but it must not

be concluded that they have only an imaginary value. They

have a value proportional to the land and labor that enter

into their production. Gold and silver, like other goods and

food products, can only be produced at costs roughly

proportional to the value set upon them, and whatever man

produces by labor, this labor must provide his maintenance.

It is the great principle that one hears every day from the

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mouths of the humble classes, who have no part in our

speculations, and who live by their labor or their

enterprise. "Everybody must live."

End of the first part.

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Part Two: Money and Interest

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Chapter One: Barter

Abstract: Because the opportunity cost of a good

cannot be fixed, it is impossible to know the

proper exchange ratios for barter. This problem is

overcome in the market by using commodities that

have marketable characteristics, such as

transportability, durability, and a recognized

economic value, to serve as a medium of exchange.

Prices of goods do not strickly follow the

quantity theory of money.

In part one, an attempt was made to prove that the real

value of everything used by men is proportional to the

quantity of land used for its production, and for the upkeep

of those who produced it. In this part two, I will start by

summing up the different degrees of land fertility in

several countries, and the different kinds of products it

can bring forth in greater abundance, according to its

intrinsic quality. Then, assuming the establishment of towns

and their markets to facilitate the sale of these products,

it will be shown, by comparing exchanges that could be made,

wine for cloth, wheat for shoes, hats, etc., and by the

difficulty involved in transporting these different products

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or merchandises, that it was impossible to fix their

respective intrinsic value. Therefore, it was absolutely

necessary for men to find a substance easily transportable,

not perishable, and having, by weight, a proportion or

value68 equal to the different products and merchandises,

whether needed or convenient. Hence there arose the choice

of gold and silver for large business, and of copper for

small transactions.

These metals are not only durable and easy to

transport, but correspond to the employment of a large area

of land for their production, which gives them the true

value people seek in an equivalent [i.e. a medium of

exchange].69

Mr. Locke who, like all the English writers on this

subject, has looked only to market prices, establishes that

the value of all things is proportional to their abundance

or scarcity, and to the abundance or scarcity of the silver

for which they are exchanged [i.e. the naïve quantity theory

of money]. It is generally known that the prices of products

and merchandise have increased in Europe ever since a great

quantity of silver has been imported from the West Indies.

68

Here again Cantillon makes a direct connection between ―proportional‖ and economic value. 69

In the 1952 French edition of the essay, a note underlines the fact that Cantillon was attached to the idea

that money must first be a good before it can become money. This is an issue that Condillac also stressed.

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However, I think we must not believe, as a general

rule, that the market prices of things ought to be

proportional to their quantity and to the amount of silver

in circulation in a particular place, because the products

and merchandise that are to be exported do not influence the

prices of those which remain. If, for example, there is

twice as much wheat in a market town than what is consumed

there, and we compare the whole quantity of wheat to that of

silver, the wheat would be more abundant, in proportion, to

the silver destined for its purchase. The market price will

be maintained just as if there were only half the quantity

of wheat, since the other half can be, and even must be,

sent into the city, and the cost of transport will be

included in the city price, which is always higher than that

of the town. Nevertheless, apart from the case of hoping to

sell in another market, I consider that Mr. Locke's idea is

correct in the sense of the following chapter, and not

otherwise.

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Chapter Two: Of Market Prices

Abstract: Market prices are determined by the

bargaining between suppliers and demanders. Price

determination by supply and demand is illustrated

with a thought experiment that uses a fixed

quantity of a perishable product (i.e. green peas)

and known maximum valuations of consumers.

Let us assume that there are butchers on one side, and

buyers on the other. The price of meat will be determined

after some bargaining, and a pound of beef will be valued in

silver [i.e. money] approximately the same as all beef

offered for sale in the market [i.e. supply], is to all the

silver brought there to buy beef [i.e. demand].

This proportion [or price] is settled by bargaining.

The butcher sets his price according to the number of buyers

he sees, while the buyers, on their side, offer less if they

think the butcher will make fewer sales. The price set by

some is usually followed by others. Some are cleverer in

marketing their merchandise, others in discrediting them.

This method of fixing market prices has no exact or

geometrical foundation, since it often depends upon the

eagerness or the abilities of a small number of buyers or

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sellers. However, it does not appear that it could be done

in a more suitable way. It is clear that the quantity of

products or merchandise offered for sale, proportioned to

the demand or number of buyers, is the basis on which is

fixed, or always assumed to be fixed, actual market prices.

In general, these prices do not vary much from intrinsic

value.

Let us take another case. Several hotel managers have

been told at the beginning of the season to buy green peas.

One owner has ordered the purchase of 10 quarts for 60

livres, another 10 quarts for 50 livres, a third 10 quarts

for 40 livres, and a fourth 10 quarts for 30 livres. If

these orders are to be carried out, there must be 40 quarts

of green peas in the market. Suppose there are only 20. The

sellers, seeing many buyers, will keep up their prices, and

the buyers will come up to the prices asked, so that those

who offer 60 livres for 10 quarts will be the first served.

The sellers, seeing later that no one will go above 50, will

let the other 10 quarts go at that price. Those who had

orders not to exceed 40 and 30 livres will go away empty

handed.

If instead of 40 quarts there were 400, not only would

the hotel managers get the green peas much below the sums

laid down for them, but the sellers, in order to be

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preferred over the others by the few buyers, will lower

their green peas almost to their intrinsic value, and in

that case, many managers who had no orders will buy some.

It often happens that sellers, who are too stubborn in

keeping up their price in the market, miss the opportunity

of selling their products or merchandise to their advantage

and are thereby losers. It also happens that by sticking to

their prices, they may be able to sell more profitably

another day.

Distant markets can always affect the prices of local

markets: if wheat is extremely expensive in France, its

price will increase in England and in other neighboring

countries.

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Chapter Three: The Circulation of Money

Abstract: Farm production produces three rents,

one of which sustains the farm workers, while the

other two can be sold at wholesale to

entrepreneurs who in turn provide property owners

and farmers with goods and merchandise. This is

the circular flow model of the economy. Money

facilitates the flow and timing of rent payments

(i.e. “velocity”) and the rate of the monetary

flow determines the ratio between the quantity of

money and the value of annual production. This

model is then used to explain the implications of

international trade.

It is the general opinion in England that a farmer must make

three rents. The first is the principal and true rent that

he pays to the property owner, which is assumed to be equal

in value to one-third of the farm’s output. A second rent

goes for his maintenance and that of the men and horses he

employs to operate the farm, and a third rent that he keeps

for making the business profitable.

The same idea generally is the norm in other countries

of Europe, though in some states, like Milan, the farmer

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gives up half the product instead of a third. It is also

true that many landlords in all countries try to lease their

farms at the highest price they can; but when it is above

one-third of the product, the farmers generally are very

poor. I do not doubt that the Chinese landowner extracts

from his farmer more than three-fourths of the product of

the land.

However, when a farmer has some capital to carry on the

management of this farm, the owner who leases him the farm

for one-third of the product will be sure of payment and

will be better off by such a deal than if he leases his land

at a higher rate to a poor farmer and faces the risk of

losing all his rental income. The larger the farm, the

better off the farmer will be. This is seen in England where

farmers are generally more prosperous than in other

countries where farms are small.

The assumption I shall make in this inquiry of the

circulation of money is that farmers earn three rents and

they spend the third rent to live more comfortably, instead

of saving it. This is indeed the case with most farmers in

all countries.

All the products in the state come directly or

indirectly from the hands of the farmers, as well as all the

materials from which commodities are made. The land produces

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118

everything but fish, and even then, the fishermen who catch

the fish must be maintained by the products of the land.

The three rents of the farmer must therefore be

considered the principal sources or, so to speak, the

mainspring of circulation in the state. The first rent must

be paid to the property owner in cash. For the second and

third rents, cash is needed for the iron, tin, copper, salt,

sugar, cloth, and generally all the products from the city

that are consumed in the countryside. However, all that

hardly exceeds one-sixth of the total of the three rents. As

for the food and drink of the country folks, cash is not

always necessary to obtain them.

The farmer may brew his beer or make his wine without

spending money. He can make his bread, slaughter the oxen,

sheep, pigs, etc. that are eaten in the country. He can pay

most of his assistants in wheat, meat, and drink, not only

laborers, but country artisans as well, by valuing products

at the prices of the nearest markets, and labor at local

wage rates.

The things necessary to life are food, clothing, and

housing. There is no need for cash to obtain food in the

country, as I have just explained. If coarse linen and

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119

cloths are made there70 and if houses are built there, as is

often the case, the labor may be paid in barter by valuation

without cash being needed.

The only cash needed in the countryside is for the rent

payment to the property owner and for the goods obtained

from the city, such as knives, scissors, pins, needles,

cloths for some farmers or other well-to-do people, kitchen

utensils, plates, and generally all that is obtained from

the city for use in the countryside.

I have already noted that it has been estimated that

half the inhabitants of a state live in the cities, and that

consequently, those who live in the city consume more than

half the production of the land. Cash is therefore

necessary, not only for the rent payment to the owner,

corresponding to one-third of the product of the land, but

also for the city merchandise consumed in the country, which

may amount to something more than one-sixth of the product

of the soil. However, one-third and one-sixth amount to half

the product. The cash circulating in the country must

therefore be equal to at least one-half the product of the

land, while the other half, or somewhat less, may be

consumed in the country without need for cash.

70

In Cantillon’s example of the opportunity cost of an apprenticeship, he included the cost of clothing the

apprentice because children on the farm contributed much to the production of their homespun clothing,

while the apprentice does not.

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120

The circulation of this money takes place when the

property owners spend the rents they collected in lump sums

from the farmers on retail purchases in the city. The

entrepreneurs of the cities (e.g. butchers, bakers, brewers,

etc.) then collect this same money, little by little, in

order to buy goods from the farmers, such as cattle, wheat,

barley, etc. In this way, all the large sums of money are

distributed in small amounts, and all the small amounts are

then collected to make payments in large amounts, directly

or indirectly, to the farmers. Therefore this money serves

both in wholesale and retail.

When I stated that the necessary quantity of money for

circulation in the countryside is often equal to half the

product of the land, this is the minimum. For the

circulation in the countryside to be easily conducted, I

will suppose that the cash needed is equal in value to two-

thirds of the farmers’ income, or two-thirds of the product

of the land. It will be seen later that this assumption is

not far from the truth.

Let us now imagine that the money conducting the whole

circulation in a small state is equal to 10,000 ounces of

silver, and that all the payments made with this money,

country to city, and city to country, are made once a year.

In addition, these 10,000 ounces of silver are equal in

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value to two of the farmers’ rents, or two-thirds of the

product of the land. The rents collected by the property

owners will correspond to 5,000 ounces, and the whole

circulation of the remaining silver between the people of

the countryside and those of the city, made by annual

payments, also will correspond to 5,000 ounces.

However, if the owners stipulate that their farmers

make payments every six months instead of once a year, and

if the other debtors also make their payments every six

months, this will alter the pace of circulation. While

10,000 ounces were needed to make the annual payments, only

5,000 will now be required because 5,000 ounces paid twice

over will have the same effect as 10,000 ounces paid once.

Furthermore, if the owners stipulate that their farmers

make quarterly payments, or if they are satisfied to receive

payments from the farmers as the four seasons enable them to

sell their products, and if all other payments are made

quarterly, only 2,500 ounces will be needed for the same

circulation that would have required 10,000 ounces paid

annually. Therefore, supposing that all payments are made

quarterly in the small state in question, the proportion of

the value of the money needed for the circulation is to the

annual product of the soil (or the three rents), as 2,500

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livres is to 15,000 livres, or 1 to 6, so that money would

correspond to a one-sixth of the annual production.

However, considering that each branch of the

circulation [i.e. the economy] in the cities is carried out

by entrepreneurs, and that the consumption of food is paid

for daily, weekly, or monthly, and that clothing purchased

once or twice a year by families is paid for at different

times by different people; and considering also that the

expenditure on beverages is usually made daily, and that

payment for beer, coal, and a thousand other articles of

consumption is very prompt, then it would seem that the

proportion we have established for quarterly payments would

be too high and that the circulation of products estimated

at 15,000 ounces of silver in value could be conducted with

much less than 2,500 ounces of silver coins.

However, because farmers have to make large payments to

the owners at least every quarter and that the taxes

collected by the prince or the State upon consumption goods

are accumulated by the tax collectors to make large payments

to the Receivers-General, there must be enough cash in

circulation to make these large payments without difficulty,

and without hindering the circulation of currencies for the

food and clothing of the people.

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123

It will be understood from this that the proportion of

the amount of money needed for circulation in a state is not

incomprehensible, and that this amount may be greater or

less in a state depending on the mode of living and the

speed of payments. It is very difficult to lay down anything

definite about this quantity in general, as the proportion

may vary in different countries. Therefore, it is only

conjectural when I say that generally, "the cash or money

necessary to carry on the circulation and exchange in a

state is roughly equal in value to one-third of all the

owners’ annual rents of the said state."

Whether money is scarce or plentiful in a state, this

proportion will not change much, because where money is

abundant, land is leased at higher rates and at lower rates

where money is scarce. This rule will always be true, at all

times. In states where money is scarcer, there usually is

more barter by valuation, than in those where money is

plentiful, and circulation is more prompt and less sluggish

than in those where money is not so scarce. Thus it is

always necessary, when estimating the amount of money in

circulation, to take into account the speed of its

circulation.

Assuming that the money in circulation is equal to one-

third of all the owners’ rents and that these rents equal to

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one-third of the annual product of the land, it follows that

"the money circulating in a state is equal in value to the

one-ninth of all the annual product of the land."

Sir William Petty, in a 1685 manuscript, frequently

assumes that the money in circulation is equal to one-tenth

of the product of the land without explaining his reasoning.

I believe he formed this opinion from experience and from

his practical knowledge of both the money circulating in

Ireland (a country he had measured as a surveyor) and of

production, which he estimated from observation. I am not

far removed from his idea, however, I chose to compare the

money circulating to the owners' rents, which are ordinarily

paid in cash and easily ascertainable by a uniform land tax,

rather than to the products of the land because of their

daily price variations in the markets, and the fact that a

large part of the product is consumed without ever entering

the markets. In the next chapter, I shall give several

reasons, supported by examples, to strengthen my conclusion.

I think this rule is useful, even if it is not

mathematically exact in any country. It is sufficient if it

is near the truth and if it prevents governors of states

from forming extravagant ideas about the amount of money in

circulation. There is no branch of knowledge in which one is

more subject to error than statistics when they are based on

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one’s imagination, and none is more informative when they

are based upon detailed facts.

Some cities and states, which have no land to call

their own, subsist by exchanging their labor and

manufactured goods for the products of other lands. For

example, in Hamburg, Dantzig, several other cities of the

Empire, and even part of Holland, it seems more difficult to

estimate the amount of cash in circulation. However, if we

could estimate the amount of foreign land used for their

subsistence, the calculation would probably not differ from

the one I made for the other states that chiefly subsist on

their own products, and which are the subject of this essay.

As to the cash needed to carry on foreign trade, it

seems that no more is required than what is in circulation

in the state when the balance of foreign trade is equal,

that is when the products and merchandise sent abroad are

equal in value to those imported.

If France sends cloth to Holland and receives spices of

equal value in return, the property owner who consumes these

spices pays their value to the grocer, who pays the same

amount to the cloth maker, to whom the same amount is due in

Holland for the cloth he sent there. This is done using

bills of exchange, which I will explain later. These two

payments take place in France, unconnected to the rent of

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the property owner, and no money leaves France because of

these transactions. All other classes of society consuming

Dutch spices similarly pay the grocer. Those living on the

first rent, that is the property owners, pay from this rent,

and those who live on the other two rents, in the country or

the city, pay the grocer, directly or indirectly, out of the

money that conducts the circulation of these rents. The

grocer again pays this money to the manufacturer in Holland

for his bill of exchange and when the balance is equal, no

increase of money is needed for circulation in the state due

to foreign trade. But if it is not equal, if more

merchandise is sold to Holland than is bought back, or vice

versa, money is needed for the surplus that Holland must

send to France or France to Holland. This will increase or

diminish the amount of money circulating in France.

It may even occur that when the balance with the

foreigner is equal to the trade with him, commerce with this

foreigner may slow down the circulation of currencies, and

consequently, a greater quantity of money is required

because of this commerce.

For example, if the French ladies who wear French

fabrics wish to wear Dutch velvets paid for by the cloth

sent to Holland, they will buy these velvets from the

merchants who imported them from Holland, and these

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127

merchants will pay the cloth manufacturers. The money thus

passes through more hands than if these ladies took their

money to the cloth manufacturers and contented themselves

with French fabrics. When the same money passes through the

hands of several entrepreneurs, the rapidity of circulation

is slowed down. But it is difficult to make an exact

estimate of this sort of delay, which depends upon various

circumstances. Thus, in the present example, if the ladies

pay the merchant for the velvet today, and the merchant pays

his bill with the manufacturer in Holland tomorrow, and if

the manufacturer pays the wool merchant the next day, and

this last pays the farmer the day after, it is possible that

the farmer will keep the money in hand more than two months

to make up the quarter's rent he owes to his landlord. This

money might, in two months, have circulated through the

hands of a hundred entrepreneurs without slowing down the

circulation needed in the state.

After all, we must consider the rent collected by the

property owner as the most necessary and considerable part

of the money in circulation. If the owner lives in the city

and the farmer sells all his production and buys all the

goods needed in the country in the same city, the money may

always remain in the city. The farmer will sell products

there exceeding half the output of his farm and will pay his

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landlord the money value of one-third of his product and the

rest to merchants or entrepreneurs for goods to be consumed

in the country. Even here, however, as the farmer sells his

products for lump sums, which are subsequently distributed

in retail purchases, and are again collected to serve for

lump payments to the farmers, the circulation always has the

same effect (subject to its rapidity) as if the farmer took

the money received for his products to the country, and sent

it back again to the city.

The circulation always consists of the large sums,

received by the farmer for his products, being distributed

at retail, and being brought together again to make large

payments. Whether part of this money leaves the city, or

remains there entirely, may be regarded as the circulation

between city and country. All the circulation takes place

between the inhabitants of the state, and they are all fed

and maintained in any event from the product of the land and

raw materials of the country.

It is true that the wool, for example, which is brought

from the country, is worth four times its former value when

made up into cloth in the city. However, this increase of

value, which is the price of the workmen’s labor and

manufactures in the city, is again exchanged for the country

products that serve for the laborer’s maintenance.

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Chapter Four: Further Reflection on the Rapidity or Slowness

of the Circulation of Money in Exchange

Abstract: Large transactions can be accomplished

with the use of bills of exchange or barter, which

reduces the demand for money. Ordinary

transactions by people require actual coin money

in circulation. A variety of factors, therefore,

affect the flow of money in circulation and this

in turn affects the amount of money in

circulation.

Let us assume that the farmer pays 1,300 ounces of silver

every quarter to the property owner, who pays, every week,

100 ounces to the baker, butcher, etc. and that these, in

turn, pay the farmer 100 ounces every week, so that the

farmer collects every week as much money as the property

owner spends. In this case there will be only 100 ounces in

constant circulation; the other 1,200 ounces will remain

held partly by the property owner and partly by the farmer.

However, it rarely happens that the property owners

spend their rents in a fixed and regular proportion. In

London, as soon as a property owner receives his rent, he

deposits most of it with a goldsmith or banker, who lends it

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at interest, so that this part is in circulation. Or else

the property owner spends a large part of it on the many

things he needs for his household. He may even borrow money

before he gets his next quarter's rent. Thus the money of

the first quarter's rent will circulate in a thousand ways

before it is accumulated by the farmer to make his second

quarter payment.

When it comes time to pay the second quarter rent, the

farmer will sell his products in large amounts. Those who

buy his cattle, wheat, hay, etc. will already have collected

the price of these goods from their retail sales. Thus, the

money of the first quarter will have circulated in the

retail trade for nearly three months before being collected

by the retail dealers, and given to the farmer who will use

it to make his second quarter payment. It would seem from

this that less money would suffice for the circulation in a

state than we have assumed.

Barter does not require much cash because goods can be

evaluated at the market price on the day of delivery. If a

brewer supplies a tailor with beer for his family, and if

the tailor in turn supplies the brewer with the clothes he

needs, the only cash needed between these two traders is the

amount of the difference between the two transactions.

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131

If a merchant in a market town sends commodities to an

entrepreneur in the city, and in return the entrepreneur

sends the merchant products from the city to be consumed in

the country, throughout the year, business between these two

dealers, and mutual confidence leads them to account for

their commodities and merchandise at their respective market

prices, and the only money needed for this commerce will be

the balance that one owes to the other at the end of the

year. Even then, this balance may be carried forward to the

next year, without the actual payment of any money. All the

entrepreneurs of a city who continually do business with

each other may practice this method. Barter exchange by

valuation does seem to reduce the cash in circulation, or at

least to accelerate its movement by making it unnecessary

when people have confidence in each other and can use this

method of exchange by valuation. It is not without reason,

as is commonly said, that trust in commerce makes money less

scarce.

Goldsmiths and bankers, whose tickets71 serve as

payment like coin money, also add to the speed of

circulation, which would be retarded if money was required

for payments where tickets now suffice. And although these

71

Goldsmiths issued warehouse receipts for gold deposited with them while bankers issued banknotes.

These were the paper money of the time, but both represented a legal claim for gold and they were typically

accepted as payment if the issuers were considered trustworthy.

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goldsmiths and bankers always keep on hand a large part of

the coin money they have received for their tickets, they

also put into circulation a considerable amount of this

effective money as I shall explain later when dealing with

public banks.

All these reflections seem to prove that the

circulation in a state could be conducted with much less

coin money than what I previously assumed was necessary.

However, the following inductions appear to counterbalance

them and to contribute to the slowing down of circulation.

I will first observe that all commodities are produced

by labor that may possibly—strictly speaking—be carried on

with little or no actual money, as I have often suggested.

But the workers who make goods in cities or market towns

must be paid in coin money. If a house has cost 100,000

ounces of silver to build, all this sum or most of it, must

have been paid in small amounts on a weekly basis to the

brick maker, masons, carpenters, etc., directly or

indirectly. The expenditures of small families, which are

always more numerous in cities, must be made with coin

money. With such small purchases, credit, barter, and

tickets, like banknotes do not work. Merchants and

entrepreneurs demand cash for the things they supply, and if

they give credit to a family for a few days or months, they

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require a substantial down payment. A wagon builder, who

sells a wagon for 400 ounces of silver in notes, will have

to convert them into coin money to pay for all the materials

and the men who have worked on the wagon if they have worked

on credit. If he has paid them already, the money will be

used to pay them to start working on a new one. The sale of

the wagon will leave him the profit of his enterprise and he

will spend this profit to maintain his family. He could not

be satisfied with notes, unless he can afford to put

something aside or deposit it to earn interest.

The consumption of the inhabitants of a state is, in a

sense, entirely for food. Lodging, clothing, furniture, etc.

correspond to the food of the men who have worked upon them,

and in the cities, all beverages and food are necessarily

paid for in coin money. In the families of landowners, who

live in the city, food is paid for every day or every week.

In their families, wine is paid for every week or every

month; hats, stockings, shoes, etc. are ordinarily paid for

in coin money, at least the payments correspond to cash for

the men who have worked upon them. All the sums used to make

large payments are divided, distributed, and spread in small

payments corresponding to the maintenance of the workmen,

servants, etc., and all these sums are necessarily collected

and reunited by the entrepreneurs and retailers, who are

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employed in providing the subsistence of the inhabitants, to

make large payments when they buy commodities from the

farmers. An alehouse keeper collects by sols and livres the

sums he pays to the brewer, who uses them to pay for all the

grain and materials he buys from the country. One cannot

imagine that anything could be purchased for cash in a

state, like furniture, merchandise, etc. at a value that

does not correspond to the maintenance of those who have

produced it.

Circulation in the cities is carried out by

entrepreneurs and always corresponds, directly or

indirectly, to the subsistence of the servants, workmen,

etc. It is inconceivable that the circulation in small

retail businesses could be conducted without cash. Notes may

serve as counters in large payments for a certain time; but

when the large sums come to be distributed and spread into

small transactions, as is always the case sooner or later in

the course of circulation in a city, notes cannot serve this

purpose and cash is needed.

All this presupposes that all the classes in a state

who practice some economy, save and keep out of circulation

small amounts of cash until they have enough to invest at

interest or profit.

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135

Many miserly and timid people will bury and hoard cash

for considerable periods of time.

Many property owners, entrepreneurs and others, always

keep some cash in their pockets or safes so that they do not

run out of money and to protect them against unforeseen

emergencies. If a gentleman says that he never had less than

20 louis72 in his pocket throughout the whole year, it may

be said that this pocket has kept 20 louis out of

circulation for a year. No one likes to spend to their last

penny or to be completely without money. People like to

receive a new payment before paying debt, even if they have

the money.

The funds of minors and of litigants are often

deposited in cash and kept out of circulation.

Beside the large quarterly payments that pass through

the hands of the farmers, there are wholesale transactions

between entrepreneurs and payments from borrowers to lenders

that occur at different times. All these sums are collected

in the retail trade, are dispersed again, only to come back

to the farmer sooner or later. However, they would seem to

require a larger amount of cash for circulation than if

these large payments were made at times different from those

when the farmers are paid for their commodities.

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136

In conclusion, there is such a great a variety in the

organization of the inhabitants in the state, and in the

corresponding circulation of coin money, that it seems

impossible to lay down anything precise or exact about the

proportion of money sufficient for circulation. I have

produced so many examples and inductions which make it clear

that I am not far from the truth in my conclusion "that the

actual money necessary for the circulation of the state

corresponds nearly to the value of the third of all the

annual rents of the property owners." When the owners have a

rent that amounts to half the production, or more than a

third, a greater quantity of coin money is needed for

circulation, other things being equal. When there is great

confidence in the banks and in book credits, or when the

speed of circulation is accelerated in any way, less money

will suffice. However, I shall show later that public banks

do not bring as many advantages as is usually assumed.

72

A French gold coin.

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Chapter Five: On the Inequality of the Circulation of Money

in a State

Abstract: Rural France was impoverished because

commodities had to be sent to the capital and

major cities to pay taxes to the state and rents

to the property owners living there. It is argued

here that if factories were permitted in rural

areas, basic commodities could be turned into

goods, which could then be sent to the cities at a

much lower transport cost. This would save

resources in transportation and benefit both rural

populations and property owners.

The city always supplies various goods to the country, and

the property owners who reside in the city should always

receive about one-third of the production of their land. The

country thus owes to the city more than half the production

of the land. This debt would always exceed one-half if all

property owners lived in the city, but because most owners

with less significant land holdings live in the country, I

suppose that the balance or debt, which continually returns

from the country to the city, is equal to half the

production of the land and is paid to the city with half of

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the commodities transported from the countryside and sold to

pay this debt.

The countryside of a state or kingdom owes a constant

balance to the capital to pay rents to the great property

owners who reside there, and to pay taxes to the State or

crown, most of which are spent in the capital. All the

provincial cities owe a constant balance to the capital, for

the State’s property and consumption taxes, and for the

different goods that they obtain from the capital. It is

also the case that several individuals and property owners,

who live in the provincial cities, will spend some time in

the capital for pleasure, or for the judgment of their

lawsuits in final appeal, or because they send their

children there for an elite education. Consequently, all

these expenses incurred in the capital are drawn from the

provincial cities.

It may therefore be said that all the countryside and

cities of a state regularly owe an annual balance or debt to

the capital. However, because such payments are made in

money, it is clear that the provinces always owe

considerable sums to the capital. The products and

commodities that the provinces send to the capital are sold

to pay for these debts and balances.

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139

Now assume that the circulation of money in the

provinces and in the capital is equal both in terms of the

quantity of money and the speed of circulation. The balance

will be first sent to the capital in cash and this will

decrease the quantity of money in the provinces and increase

it in the capital. Consequently, products and goods will be

more expensive in the capital than in the provinces because

of the greater abundance of money in the capital. The

difference between the prices in the capital and the

provinces must pay for the costs and risks of transport,

otherwise cash will be sent to the capital to pay the

balance and this will continue until the differences in

prices between the capital and the provinces cover the costs

and risks of transport. Then the merchants and entrepreneurs

of the market towns will buy the products of the villages at

a low price and will have them transported to the capital to

be sold at a higher price. This difference in price will of

necessity pay for the maintenance of the horses and

employees of the entrepreneur, plus profit, or else he would

cease his enterprise.

As a result, the price of farm products of equal

quality will always be higher in areas that are closer to

the capital than in those more distant in proportion to the

costs and risks of transport. In addition, areas that are

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140

adjacent to seas and rivers flowing into the capital will

get a better price for their products relative to those

which are distant (other things being equal), because water

transport is considerably less expensive than land

transport. On the other hand, there are certain foods and

goods that cannot be consumed in the capital because they

are not suitable or cannot be sent there on account of their

bulk, or because they would be spoiled on the way. These

will be infinitely cheaper in the country and distant

provinces than in the capital, because of the much smaller

amount of money in circulation in the distant provinces.

Therefore fresh eggs, game, fresh butter, firewood,

etc. will generally be much cheaper in the province of

Poitou,73 while wheat, cattle and horses will be more

expensive in Paris, the difference being the cost and risk

of transport, and the fees for entering the city.

It would be easy to make an infinite number of

inductions of the same kind to justify by experience the

necessity of an inequality in the circulation of money in

the different provinces of a great state or kingdom, and to

show that this inequality is always relative to the balance

or debt, which belongs to the capital.

73

A province in southwestern France, just north of Bordeaux.

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141

If we assume that the balance owed to the capital

amounts to one-fourth of the production of the land of all

the provinces of the state, the best use that can be made of

the land would be to employ the country bordering on the

capital to produce the kinds of products which could not be

drawn from distant provinces without much expense or

deterioration. This is in fact what always takes place. The

market prices in the capital regulate how the farmers employ

the land for this or that purpose. They use the closest

lands, when suitable, for market gardens, pasture, etc.

Therefore, when possible, factories for cloth, linen,

lace, etc. ought to be set up in remote provinces and

factories to make tools of iron, tin, copper, etc. should be

located in the neighborhood of coal mines or forests, which

are otherwise useless because of their distance. In this

way, finished manufactured goods could be sent to the

capital with much lower transportation cost than by sending

the raw materials to be manufactured in the capital, as well

as the subsistence of the artisans who manufacture them.

This would save a large quantity of horses and transport

workers who could be better employed for the benefit of the

state. The land could serve to maintain the nearby workmen

and useful artisans and a multitude of horses could be saved

that are now used for unnecessary transportation. In this

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way, the remote areas would yield higher rents to property

owners and the inequality of circulation between the

provinces and the capital would be considerably less and

better proportioned.

Nevertheless, to set up manufacturing in this way

requires not only much encouragement and capital funds, but

also some way to ensure a regular and constant demand,

either in the capital itself or in foreign countries.

Exports to foreign countries serve the capital by either

paying for the goods it imports, or with the money it gets

in return.

When these factories are established, perfection is not

attained immediately. If some other province produces the

goods better or cheaper, or has an advantage in

transportation costs because it is closer to the capital or

can resort to river and sea transportation, the new

manufactures will not succeed. All these circumstances have

to be considered when setting up a factory. My intention in

this essay is not to explain these issues, but only to

suggest that so far as practicable, significant

manufacturing should be set up in provinces far from the

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143

capital to produce a less unequal distribution of money

between rural areas and the capital.74

For when a distant province has no factories and

produces only ordinary foodstuffs and is without water

communication to the capital or the ocean, it is surprising

how scarce money is compared to that which circulates in the

capital, and how little revenue the prince and the property

owners who reside in the capital receive from even their

best lands.

The wines of Provence and Languedoc75 that are sent to

the north, must be sent on the long and difficult route

around the Straits of Gibraltar and after having passed

through the hands of several entrepreneurs, yield very

little to the property owners living in Paris.

However, these distant provinces must send their

commodities to the capital or elsewhere (either within the

state or to foreign countries), despite all the

disadvantages of transport and distance, in order to pay the

balance owed to the capital. If there were rural factories

to pay this balance, the commodities would be mostly

74

Advocating rural manufacturing is usually considered a mercantilist or interventionist policy and this

passage has been used to label Cantillon a mercantilist. However, under the French mercantilist regulatory

regime, factories in the capitol and cities were given monopolies and were tightly regulated. These rules

and regulations made it virtually impossible to set up substantial manufacturing in rural areas. People in

rural areas made their own cloths but were largely prohibited from manufacturing clothing for sale in the

cities and capital. 75

Two provinces in Southern France on the Mediterranian Sea

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consumed locally and in that case, the rural population

would be much larger.

When a province pays its balance only with commodities

that yield little in the capital because of transport costs,

it is clear that the property owners living in the capital

give up the production of a large amount of land in the

country to receive little in the capital. This arises from

the inequality of money, and this inequality results from

the constant balance owed to the capital by the province.

Currently, if a state or kingdom supplies foreign

countries with goods from its own factories and does enough

of this commerce to draw in a constant balance of money from

abroad every year, money will be more plentiful and the

circulation will become more substantial than in foreign

countries, and consequently, land and labor will gradually

command a higher price. It therefore follows that in all the

branches of commerce, this state will exchange a smaller

amount of land and labor with the foreigner for a larger

amount, so long as these circumstances continue.76

But if a foreigner resides in the state in question, he

will be in roughly the same situation and circumstances as

the citizen of Paris who owns land in distant provinces.

76

The mercantilists argued for a positive balance of trade as well, but as Cantillon explains, the actual

advantages of a positive balance of trade—here in terms of the ―terms of trade argument‖—happen only

under certain economic conditions and cannot last indefinately.

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Beginning in 1646,77 factories for making cloth and

other goods were built in France and it appeared to trade,

at least in part, in the way I described. Since the decay of

France, England has taken possession of this trade; and all

states appear to flourish by it to a larger or lesser

extent. The inequality of the circulation of money in the

different states represents the inequality of their

comparative power, other things being equal, and this

inequality of circulation is always related to the balance

of foreign trade.78

It is easy to judge from what has been said in this

chapter that the assessment of taxes by the royal tithe, as

suggested by Mr. de Vauban, would be neither advantageous,

nor practicable. If taxes on land were levied in money, in

proportion to the rents of the property owners, it would be

fairer. But I must not stray from my subject to show the

inconveniences and impossibility of Mr. de Vauban's

proposal.79

77

This date marks the beginning of a period of tolerance in France for the Huguenots who were heavily

involved in the textile industry. 78

This again appears to be a mercantilist-like statement. However, Cantillon is referring to the Hugonots

and their role in textile manufacturing. During the second quarter of the 17th

century, protestantism was

tolerated in France and the Hugonots launched the cotton textile business. Around 1660, King Louis VIX’s

minister Colbert launched government factories in Paris and other cities drawing in astisans from around

France. Subsequently, there was more intolerance of the Hugonots and in 1685, Protestantism was banned

as was the production of cotton textiles. Most Hugonots converted nominally to Catholicism, but the

factory owners took their skills and whatever capital they could and emmigrated, mostly to England. 79

Sebastien de Vauban was an engineer and Marshall in the French military who built fortification and

developed a successful system of seige warfare and he could be also considered the grandfather of the

French civil engineering tradition. Interestingly, he was a vocal opponent on economic grounds of the

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Chapter Six: The Increase and Decrease of the Quantity of

Money in a State

Abstract: Here Cantillon uses his price-specie

flow mechanism to analyze some of the effects of

inflation. Increasing the supply of money by

mining hurts some people and benefits others

because certain prices and incomes rise faster

than others. However, if the new money is

accumulated and saved by those who successfully

export goods, either because of superior quality

or more efficient transportation, it will lead to

higher standards of living.

If gold or silver mines were found in a state, and

considerable quantities of minerals were extracted from

them, the owners of these mines, the entrepreneurs, and all

those who work there, will increase their expenditures in

proportion to the wealth and profit they make. They will

also lend the money they have over and above what they need

for their expenses and earn interest.

repeal of the edict of Nantes and the subsequent persecution of the Hugonots. In 1707, he wrote Projet

d'une dixme royale qui, supprimant la taille, les aydes, les doüanes d'une province à l'autre, les décimes du

Clergé, les affaires extraordinaires... produiroit au Roy un revenu certain et suffisant where he called for a

10% tax on all land and trade. Cantillon is probably correct to suggest that a single tax on land rents would

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All this money, whether lent or spent, will enter into

circulation and will not fail to raise the price of

commodities and goods in all the channels of circulation it

enters. Increased money will bring about increased

expenditure, and this will cause an increase of market

prices in the good years and to a lesser degree in bad

years.

Everybody agrees that the abundance of money, or an

increase in its use in exchange, raises the price of

everything. This truth is substantiated in experience by the

quantity of money brought to Europe from America for the

last two centuries.80

Mr. Locke lays it down as a fundamental maxim that the

quantity of goods in proportion to the quantity of money is

a regulator of market prices. I have tried to elucidate his

idea in the preceding chapters: he has clearly seen that the

abundance of money makes everything more expensive, but he

has not considered how this happens. The great difficulty of

this question consists in knowing in what way and in what

proportion the increase of money raises the price of things.

be more economical and fairer. Presumably he is thinking that a tax on trade would decrease ―circulation‖

and reduce France’s relative power. 80

Cantillon refers here to the Spanish Conquests in the Americas and the fact that they took tons of gold

and silver back to Spain during the 1500s and 1600s. These imports resulted in substantially higher prices

throughout Europe.

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I have already noted that acceleration or a greater

pace in the circulation of money in exchange, is equivalent

to, to a certain degree, an increase of actual money. I have

also noted that an increase or decrease of prices in a

distant market, domestic or foreign, influences the local

market prices. On the other hand, money flows through so

many retail channels that it seems impossible not to lose

sight of it, seeing that having been amassed to make large

sums, it is distributed in small amounts in exchange, and

then gradually accumulated again to make large payments. For

these operations, it is necessary to constantly exchange

between gold, silver and copper money, according to the

requirements of exchange. It is also usually the case that

the increase or decrease of hard money in a state is not

perceived because it comes into a state from foreign

countries by such imperceptible means and proportions that

it is impossible to know exactly the quantity which enters

or leaves the state.

However, all these operations happen before our eyes

and everybody takes a direct part in them. I therefore

venture to offer a few observations on the subject, even

though I may not be able to give an exact and precise

account.

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In general, an increase of hard money in a state will

cause a corresponding increase in consumption and this will

gradually produce increased prices.

If the increase of hard money comes from gold and

silver mines within the state, the owner of these mines, the

entrepreneurs, the smelters, refiners, and all the other

workers will increase their expenses in proportion to their

profits. Their households will consume more meat, wine, or

beer than before. They will become accustomed to wearing

better clothes, having finer linens, and to having more

ornate houses and other desirable goods. Consequently, they

will give employment to several artisans who did not have

that much work before and who, for the same reason, will

increase their expenditures. All this increased expenditures

on meat, wine, wool, etc. necessarily reduces the share of

the other inhabitants in the state who do not participate at

first in the wealth of the mines in question. The bargaining

process of the market, with the demand for meat, wine, wool,

etc. being stronger than usual, will not fail to increase

their prices. These high prices will encourage farmers to

employ more land to produce the following year, and these

same farmers will profit from the increased prices and will

increase their expenditure on their families like the

others. Those who will suffer from these higher prices and

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increased consumption will be, first of all, the property

owners, during the term of their leases, then their domestic

servants and all the workmen or fixed wage earners who

support their families on a salary. They all must diminish

their expenditures in proportion to the new consumption,

which will compel a large number of them to emigrate and to

seek a living elsewhere. The property owners will dismiss

many of them, and the rest will demand a wage increase in

order to live as before. It is in this manner that a

considerable increase of money from mines increases

consumption and, by diminishing the number of inhabitants,

greater expenditures result by those who remain.

If money continues to be extracted from the mines, the

abundance of money will increase all prices to such a point

that not only will the property owners raise their rents

considerably when the leases expire and resume their old

lifestyle, increasing their servants’ wages proportionally,

but the artisans and workmen will increase the prices of the

articles they produce so high that there will be a

considerable gains in buying them from foreigners who makes

them much cheaper. This will naturally encourage several

people to import products at lower prices from foreign

factories, and this will gradually ruin the artisans and

manufacturers of the state who will be unable to sustain

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themselves by working at such low rates because of the high

cost of living.

When the over abundance of money from the mines has

diminished the number of inhabitants in a state, accustomed

those who remain to excessive expenditures, raised the

prices of farm products and the wages for labor to high

levels, and ruined the manufactures of the state by the

purchase of foreign products by property owners and mine

workers, the money produced by the mines will necessarily go

abroad to pay for the imports. This will gradually

impoverish the state and make it, in a way, dependent on

foreigners to whom it is obliged to send money every year as

it is extracted from the mines. The great circulation of

money, which was widespread in the beginning, ceases;

poverty and misery follow and the exploitation of the mines

appears to be only advantageous to those employed in them

and to the foreigners who profit thereby.

This is approximately what has happened to Spain since

the discovery of the Indies.81 As for the Portuguese, since

the discovery of gold mines in Brazil, they have nearly

always used foreign articles and manufactured goods; and it

seems that they worked the mines only for the account and

advantage of foreigners. All the gold and silver that these

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two states extract from the mines does not supply them with

more precious metal in circulation than others. England and

France usually have even more.

Now, if the increase of money in the state comes from a

balance of foreign trade (i.e. from sending abroad articles

and manufactured goods of greater value and quantity than is

imported and consequently receiving the surplus in money),

this annual increase of money will enrich a great number of

merchants and entrepreneurs in the state, and will give

employment to numerous artisans and workmen who provide the

goods sent to the foreigner from whom money is drawn. This

will gradually increase the consumption of these industrious

inhabitants and will raise the price of land and labor. But

the industrious people who are eager to acquire property

will not at first increase their expenditures: they will

wait until they have accumulated a large sum from which they

can draw a secure interest income, independent of their

occupation. Once a large number of inhabitants have acquired

considerable fortunes from this money, which enters the

state regularly and annually, they will not fail to increase

their consumption and raise the price of everything.

Although these higher prices result in greater expenditures

than they at first contemplated, they will, for the most

81

Particularly Mexico and the Inca Empire in South America.

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153

part, continue so long as their capital lasts; for nothing

is easier or more pleasant than to increase the family

expenditures, and nothing is more difficult or unpleasant

than to decrease them.

If an annual and continuous balance has caused a

considerable increase of money in a state, it will not fail

to increase consumption, raise the price of everything and

even diminish the number of inhabitants, unless additional

products are drawn from abroad proportionate to the

increased consumption. Moreover, in states that have

acquired a considerable abundance of money, it is natural to

import many goods from neighboring countries where money is

rare and consequently everything is cheap. However, as money

must be exchanged for these products, the balance of trade

will become smaller. The cheapness of land and labor in

foreign countries where money is rare will naturally cause

the building of factories and businesses similar to those of

the state, but which will not, at first, be as perfect or as

highly valued.

In this situation, the state can retain its abundance

of money, consume all its own products and a great deal of

foreign products and, over and above all this, maintain a

small balance of trade against the foreigner or at least

keep the balance leveled for many years. In other words, the

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state will import, in exchange for its commodities and

manufactured goods, as much money from these foreign

countries as it sends to them for the goods or products of

the land it takes from them. If the state is a maritime

state, the easiness and low cost of its shipping for the

transport of its commodities and manufactured goods to

foreign countries may compensate, in some way, for the high

cost of labor caused by the over abundance of money.

Therefore, the commodities and manufactured goods of this

state, expensive though they may be, will continue to sell

in foreign countries, and sometimes will be cheaper than the

manufactured goods of another state where labor is paid

less.

The cost of transport greatly increases the prices of

goods sent to distant countries. However, these costs are

very moderate in maritime states, where there is regular

shipping to all foreign ports and ships are nearly always

found there ready to sail, taking on board all cargoes

entrusted to them at a very reasonable freight.

This is not so in states where navigation does not

flourish. There, it is necessary to build ships especially

for the transportation of goods and this sometimes absorbs

all the profit; and transportation there is always very

expensive, which entirely discourages commerce.

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England today consumes not only most of its own small

production, but also a large amount of foreign products,

such as silks, wines, fruits, linens in great quantity, etc.

Meanwhile, she sends abroad the products of her mines and

manufactured goods, for the most part. No matter how

expensive labor is due to the abundance of money, she does

not fail to sell her products to distant countries, because

of her maritime advantage, at prices as reasonable as those

of France, where these same products are cheaper.

The increased quantity of money in a state may also be

caused, without a balance of trade, by subsidies paid to

this state by foreign powers, by the expenditures of several

ambassadors or travelers wanting to stay there for political

reasons, curiosity, or pleasure, or by the transfer of the

property and wealth of families who choose to leave their

country to seek religious freedom or for other reasons, and

to settle down in this state. In all these cases, the sums

entering the state always cause an increase in expenditures

and consumption and consequently, increase the prices of all

goods in the channels of exchange where money enters.82

Before the increase in the quantity of money, suppose

that a quarter of the inhabitants of the state consume meat,

82

In Cantillon’s time, many Irish Catholics left Ireland for France and Spain after Cromwell’s Conquest

during which half the population died due to war, disease, and famine. These emmigrants lost their land,

but did bring their money with them.

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wine, beer, etc. on a daily basis and frequently acquire

clothes, linens, etc., but that after the increase, a third

or half of the inhabitants consume these same things. Prices

for these goods will increase and the high price of meat

will convince several of those who formed the original

quarter, to consume less meat than usual. A man who eats

three pounds of meat daily will manage with two pounds, but

he feels the reduction. Meanwhile, the other half of the

inhabitants who hardly ate any meat at all will not feel the

reduction. The price of bread will increase gradually

because of increased consumption, as I have often suggested,

but it will be proportionally less expensive than meat. The

increase in the price of meat is noticeably felt because it

causes a reduction in consumption on the part of a small

portion of the people, but the increased price of bread is

less noticeable because the decreased consumption is spread

across the entire population. If 100,000 extra people move

to a state with 10 millions inhabitants, their extra

consumption of bread will amount to only one pound in 100,

which must be subtracted from the old inhabitants. But when

a man consumes 99 pounds of bread for his subsistence

instead of 100, he hardly feels the reduction.

When the consumption of meat increases, farmers

increase the size of their pastures to produce more meat,

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and this diminishes cropland, and consequently the amount of

wheat produced. However, what generally causes meat to

become proportionally more expensive than bread is that

imports of foreign wheat are usually permitted while imports

of beef are absolutely forbidden, as is the case in England,

or heavy import duties are imposed as in other states. This

is the reason why the rents for meadows and pastures rise in

England, with the abundance of money, three times more than

the rents of cropland.

There is no doubt that when ambassadors, travelers, and

families move to a state, the increased consumption will

cause higher prices in all the markets where they spend

their money.

As for the subsidies the state has received from

foreign powers, they are either hoarded for state

necessities or are put into circulation. If we assume they

are hoarded, they do not concern my argument for I am

considering only money in circulation. Hoarded money,

silverware, churches’ money, etc., are resources that the

state turns to in emergency situations, but are of no

present utility. If the state puts these funds into

circulation, it can only do so by spending them and this

will certainly increase consumption and raise the price of

all goods. Whoever receives this money will set it in motion

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the principal business of life—which is the food—either for

himself or someone else, since everything is connected to

this, directly or indirectly.

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Chapter Seven: More on the Increase and Decrease in the

Quantity of Money in a State.

Abstract: When there is an increase in the

quantity of money, prices will increase depending

on how the new money holders decide to spend their

money. The price changes will also be affected by

such things as regulations on trade and the

perishability of the products that are traded. In

other words the simple quantity theory of money is

naïve in proposing that a doubling of the quantity

of money would double all prices equally. Changes

in the quantity of money will change relative

prices and have real effects on the economy, a

phenomenon now know as the Cantillon Effects.

Where gold, silver, and copper are extracted from the mines,

they have an intrinsic value proportional to the land and

labor that enter into their production. States that have no

mines have the added cost of importing the metal. The

quantity of money, like that of all other commodities,

determines its value against all other goods in the

bargaining process of the marketplace.

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If England begins for the first time to make use of

gold, silver, and copper in exchanges, money will be valued

according to the quantity in circulation, proportionally to

its power of exchange against all other merchandise and

products. The bargaining process of the market will

determine this estimation of value. On the basis of this

estimation, the property owners and entrepreneurs will set

the wages of their domestic servants and workmen at so much

a day or a year, so that they and their families may be able

to live on the wages they receive.

Let us now assume that because of ambassadors and

foreign travelers residing in England, as much money has

been introduced into circulation as there was before

[thereby doubling the quantity of money]. This money will

pass first into the hands of various artisans, servants,

entrepreneurs and others who have had a share in providing

transportation, amusements, etc. for these foreigners.

Manufacturers, farmers, and other entrepreneurs will feel

the effect of the increased money, which will increase the

expenditures of a great number of people, and this will in

turn increase market prices. Even the children of these

entrepreneurs and artisans will enter into new expenditures.

With this abundance of money, their fathers will give them a

little money for their petty pleasures and they will buy

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cakes and meat pies, etc. This new quantity of money will be

distributed so that many who lived without using money

before will now have some. Many exchanges, which used to be

made on credit by valuation, will now be made with cash, and

that will increase the pace of the circulation of money in

England compared to before.

I conclude from all this that by doubling the quantity

of money in a state, the prices of products and merchandise

are not always doubled. The river, which runs and winds

about in its bed, will not flow with double the speed when

the amount of water is doubled.

The change in relative prices,83 introduced by the

increased quantity of money in the state, will depend on how

this money is directed at consumption and circulation. No

matter who obtains the new money, it will naturally increase

consumption. However, this consumption will be greater or

less, according to circumstances. It will more or less be

directed to certain kinds of commodities or merchandise,

according to the judgment of those who acquire the money.

Market prices will increase more for certain goods than for

others, however abundant the money may be. In England, the

83

Cantillon used the phrase ―proportion of the dearness,” but he is clearly describing what we now refer to

as the change in relative prices.

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price of meat might triple, but the price of wheat might

increase less than one fourth.

In England, it is still permitted to import wheat from

foreign countries, but not cattle. For this reason, however

great the increase of money may be in England, the price of

wheat can only be raised, above the price in other countries

where money is scarce, by the cost and risks of importing

wheat from these foreign countries.

It is not the same with the price of cattle, which will

necessarily be proportioned to the quantity of money offered

for meat, in relation to the quantity of meat and the number

of cattle raised there.

An ox weighing 800 pounds sells in Poland and Hungary

for two or three ounces of silver, but commonly sells in the

London market for more than 40. Yet the bushel of flour does

not sell in London for even double the price in Poland and

Hungary.

An increase of money only increases the price of

commodities and merchandise by the difference of the cost of

transport, when this transport is allowed. But in many

cases, transportation would cost more than the good is

worth, therefore, for example, timber is useless in many

places. This cost of transportation is also the reason why

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milk, fresh butter, lettuce, game, etc. are almost given

away in the provinces distant from the capital.

I conclude that an increase of actual money in a state

always causes an increase of consumption and a routine of

greater expenditures. But the higher prices caused by this

money does not affect all commodities and merchandise

equally. Prices do not rise proportionally to the quantity

of money, unless what has been added continues in the same

circulation channels as before. In other words, those who

offered one ounce of silver in the market would be the same

and only ones to offer two ounces when the amount of money

in circulation is doubled, and that is hardly ever the case.

I recognize that when a large surplus of money is introduced

in a state, the new money gives a new direction to

consumption, and even a new speed to circulation. However,

it is not possible to say exactly to what extent.84

84

Here, Cantillon has debunked the naïve Quantity Theory of Money which concludes that the real

economy is unaffected by inflation.

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Chapter Eight: Further Reflections on the Increase and

Decrease of Money in a State

Abstract: Increases in the supply of money from a

balance of trade eventually causes prices to rise.

This in turn puts pressure on domestic producers

and increases imports. The result is that the

balance of trade is reduced and eventually is

negative. This is Cantillon’s price specie-flow

mechanism which demonstrates the reasons for the

tendency for equilibrium in international monetary

flows. The balance of trade can result in economic

power, but this also causes the economy to lapse

into luxury and decline.

We have seen that the quantity of money circulating in a

state may be increased by working its mines, by subsidies

from foreign powers, by the immigration of foreign families,

by the residence of ambassadors and travelers, but above

all, by a regular and annual balance of trade, from

supplying goods to foreigners, and by receiving from them at

least part of the price in gold and silver. It is by this

last means that a state grows most substantially, especially

when its trade is accompanied and supported by ample

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shipping and by a significant output of the raw materials

necessary for the production of exported manufactured goods.

However, the continuation of this commerce gradually

introduces a great abundance of money and, little by little,

increases consumption. Foreign products must be imported to

meet this demand and must be paid for by a reduction in the

annual balance of trade. On the other hand, increased

expenditures increase the cost of labor and the prices of

manufactured goods. It often happens that some foreign

countries try to set up the same kinds of factories for

themselves, in which case, they stop buying those of the

state in question. Although these newly established

factories and manufactures are not perfect at first, they

reduce and even prevent the export of those goods from the

neighboring state into their own country, where they can be

acquired at a better price.

In this manner, the state begins to lose some branches

of its profitable trade and many of its workmen and artisans

who lose their jobs will leave the state to find employment

in new foreign factories. In spite of this diminution in the

balance of trade, the custom of importing various products

will continue. If the manufactured products of a state have

a great reputation and can be shiped to distant countries at

low cost, the state will maintain its advantage over the new

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foreign manufacturers for many years and will maintain a

small balance of trade, or at least keep it even. If,

however, some other maritime state tries to perfect the same

articles and its navigation at the same time, it will,

because of the cheapness of its manufactures, take away

several branches of trade from the state in question.

Consequently, this state will begin to lose its balance of

trade and will be forced to send a part of its money abroad

every year in order to pay for its imports.

Moreover, even if the state in question could keep a

balance of trade and its greater abundance of money, it is

reasonable to suppose that this abundance will plunge many

wealthy individuals into luxury. They will buy paintings,

precious stones from abroad, they will want silks and rare

objects, and they set such an example of luxury in the state

that in spite of the advantage of its ordinary trade, its

money will flow abroad annually to pay for this luxury. This

will gradually impoverish the state and cause it to pass

from a great power to great weakness.

When a state has arrived at the highest point of

wealth, and I always assume that the comparative wealth of

states consists mainly in their respective quantities of

money, it will inevitably fall back into poverty by the

ordinary course of things. The too great abundance of money,

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which gives power to states so long as it lasts, throws them

back imperceptibly, but naturally, into poverty. Thus it

would seem that when a state expands by trade, and the

abundance of money raises the price of land and labor, the

prince or the legislator ought to withdraw money from

circulation, keep it for emergencies, and try to slow down

its circulation by every means, except compulsion and bad

faith, to prevent its goods from becoming too expensive and

avoid the drawbacks of luxury.

However, it is not easy to perceive the opportune time

for this, or to know when money has become more abundant

than it ought to be for the good and preservation of the

advantages of the state. Therefore, princes and heads of

republics do not concern themselves much with this sort of

knowledge and strive only to make use of the abundance of

their state revenues, to extend their power and to insult

other countries on the most frivolous pretexts. All things

considered, working to perpetuate the glory of their reigns

and administration and to leaving monuments of their power

and wealth is perhaps the best they can do because according

to the natural course of humanity, the state must collapse

on its own, they only accelerate its fall a little.

Nevertheless, it seems that they should try to make their

power last during the time of their own administration.

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Few years are needed to raise abundance to the highest

point in a state, however still fewer are needed to bring it

to poverty for lack of commerce and manufacturing. Without

speaking of the rise and fall of the Venice Republic,

Hanseatic cities,85 Flanders and Brabant, the Dutch

Republic, etc. who have succeeded each other in profitable

branches of trade, one may say that France’s power has only

been on the rise from 1646 (when factories were established

to produce clothing which had previously been imported) to

1684 when a number of Protestant entrepreneurs and artisans

were driven out of France.86 That kingdom has done nothing

but recede since this last date.

I know no better measure than the leases and rents of

property owners to judge the abundance and scarcity of money

in circulation. When land is leased at high rates, it is a

sign that there is plenty of money in the state; but when

land has to be leased at much lower rates, it shows, other

things being equal, that money is scarce. I have read in The

State of France87 that acres of vineyard near Mantes—not far

from the French capital—which leased for 200 livres

85

The Hanseatic League was an association of several independent cities of northern Europe. 86

Cantillon is here referring to the explusion of the Hugonots who dominated the cotton clothing business

and which was relinquished to Indian imports. 87

Pierre le Pesant, sieur de Boisguilbert or Boisguillebert (17 February 1646 - 10 October 1714) In 1695,

Boisguilbert published Le Detail de la France; la cause de la diminution de ses biens, et la facilité du

remède in which he described the economic ruination of France caused by merchantist economic policy. He

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tournois88 of full weight in 1660, only leased for 100

livres tournois of lighter money in 1700. However, the

silver brought from the West Indies in the interval should

naturally have raised the price of land in Europe.

The author [of the State of France] attributes this

fall in rent to defective consumption. In fact, it seems

that he observed a reduction in wine consumption. However, I

think he has mistaken the effect for the cause. The cause

was a greater rarity of money in France, and the effect of

this was naturally a decrease in consumption. In this essay,

I have always suggested, on the contrary, that an abundance

of money naturally increases consumption and contributes

above everything else to a higher valuation of the land.

When abundant money raises products to honest prices, the

inhabitants eagerly work to acquire them; although they do

not show the same eagerness to acquire food and merchandise

beyond what is needed for their maintenance.

It is clear that a state with more money in circulation

than its neighbors has an advantage over them, so long as it

maintains this abundance of money.89

was an antimercantist who blamed the country’s problems on its fiscal policy while Cantillon was a

antimercantist who blamed France’s economic decline on both fiscal and monetary policies. 88

Livres tournois were coins made in Tours which were made of 1/5 less silver than livres made in Paris.

Here Cantillon indicates that the livres tournois were debased, or reduced in silver content between 1660

and 1700. 89

This statement by Cantillon sounds very mercantilist but is less so when placed in its historical context.

From the late 1680s to the late 1720s, the French government caused the exportation of money, the

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In the first place, given that the price of land and

labor are calculated in terms of money, the state where

money is most abundant will give up less land and labor than

it receives in all areas of trade. Thus the state in

question sometimes receives the product of two acres of land

in exchange for that of one acre, and the work of two men

for that of only one. It is because of this abundance of

money in circulation in London that the work of one English

embroiderer costs more than that of 10 Chinese embroiderers,

though the Chinese embroider much better and turn out more

work in a day. In Europe, people are amazed that these

people can live by working so cheap and that the wonderful

fabrics they send us cost so little.

Secondly, tax revenues are more easily raised in a

state where money is plentiful, and in relatively larger

amounts. This gives the state, in case of war or dispute,

the means to gain all sorts of advantages over its

adversaries with whom money is scarce.

If there are two princes at war over the sovereignty or

conquest of a state, where one has much money and the other

has little money but many estates worth twice the money of

his enemy, the first will be better able to attract generals

devaluation of currency, and the near destruction of private capital markets. What amounted to a series of

forced monetary deflations, led to lower real prices, and lower asset prices. See Hoffman et al. (2000,

chapter 3).

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171

and officers with gifts of money than the second will be by

giving twice the value in lands and estates. Grants of land

are subject to challenge and revocation and cannot be relied

upon like money. With money, munitions of war and food can

be bought, even from the enemies of the state. Money can be

given for secret services without witnesses, but land,

produce and goods would not serve for these purposes, not

even jewels or diamonds, because they are easily recognized.

After all, it seems to me that the comparative power and

wealth of states consist, other things being equal, in the

greater or less abundance of money circulating in them hic

et nunc.90

I still have to mention two other methods of increasing

the amount of money circulating in a state. The first is

when entrepreneurs and private individuals borrow money from

their foreign correspondents at interest, or when foreigners

send their money into the state to buy shares or government

stocks. This often amounts to very considerable sums on

which the state must annually pay interest to these

foreigners. These methods for increasing money in the state

do make it more abundant and diminish the rate of interest.

With this money, the entrepreneurs in the state find it

90

Latin phrase for ―here and now‖ suggesting that this otherwise merchantist-sounding pronouncment

applies to the short run.

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possible to borrow more cheaply, to provide work, and to

establish factories with the anticipation of a profit. The

artisans, and all those whose hands this money passes

through, consume more than they would have done if they had

not been employed by means of this money. This consequently

increases prices just as if the money belonged to the state

and through the increased consumption or expenditures this

causes, public revenues derived from taxes on consumption

are increased. Money lent to the state in this manner brings

many advantages with it, but in the end, it is always

burdensome and harmful. The state must pay the interest to

the foreigners every year and, aside from this loss, the

state is at the mercy of the foreigners who can always cause

trouble if they decide to withdraw their capital. Surely,

they will want to withdraw their capital when the state

needs it the most, as when preparing for war and defeat is

feared. The interest paid to the foreigner is always much

more considerable than the increase in pubic revenue caused

by this money. One can observe these loans passing from one

country to another, according to investors’ confidence in

the states to which they are sent. But in reality, states

that have paid heavy interest on these loans for many years,

will often find themselves bankrupt and unable to repay the

capital. When trust is shaken, shares or public stocks fall;

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foreign shareholders do not like to sustain losses,

preferring to content themselves with collecting interest,

while waiting for confidence to return. But sometimes it

does not return. In declining states, the principal

objective of public administrators usually is to restore

confidence in order to attract foreign loans. If the

ministry does not act in bad faith and keeps its

obligations, the money of the subjects will circulate

without interruption. In this case, money from abroad has

the power of increasing the quantity of money in a state.

But the borrowing road, which holds an advantage in the

present, leads to a dead end and is but a flash in the pan.

To restore a poor state with a shortage of money, a constant

and real balance of trade is needed on an annual basis, as

is the development, through navigation, of the articles and

manufactures produced cheaper and thereby suitable for

exportation.91 Merchants are the first to make their

fortunes, then the lawyers may get part of it, the prince

and tax collectors get a share at the expense of all the

others, and distribute their graces as they please. When

money becomes too plentiful in the state, luxury will follow

and the state will fall into poverty.

91

Cantillon’s recipe for economic success would appear to be production by skilled labor, trade, and

saving.

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This is roughly the cycle that may be experienced by a

large state which has both capital and industrious

inhabitants. A talented public administrator is always able

to begin the cycle over again. Not many years are needed to

see it tried and succeed, at least in the beginning, which

makes for the most interesting situation. The increased

quantity of money in circulation will be brought about by

several factors that my argument does not allow me to

examine now.

As for states without much capital and where capital

can only be increased by accidents or by particular

circumstances of the times, it is difficult to find the

means that would allow them to flourish by trade. No

administrator can restore the Republics of Venice and

Holland to the brilliant situation from which they have

fallen. But Italy, Spain, France, and England, however poor

they may be, are still capable of attaining a high degree of

power by trade alone if led by a good administration and if

they operate separately. If all these states were equally

well administered, they would be great only in proportion to

their respective capital and to the greater or lesser

industriousness of their people.92

92

Here Cantillon recognizes a basic fallacy of mercantilism which is that if one nation wins, another must

lose. Here all nations can benefit from trade (when there are no political administrative advantages) and

that benefits to all increase in proportion to the amount of capital and labor.

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The last method I can think of to increase the quantity

of money actually circulating in a state is by violence and

arms, and this method is often blended with the others,

since in all peace treaties one will try to maintain trading

rights and other privileges one could obtain. When a state

mandates contributions or makes several other states

tributary to it, this is a very sure method of obtaining

their money. I will not examine the methods of putting this

theory into practice, but I will say that all the nations

who have flourished in this manner have not failed to

decline, like states that have flourished through their

commerce. The ancient Romans were more powerful in this

manner than all the other peoples we know of. Nevertheless,

these same Romans, before losing an inch of the land of

their vast states, fell into decadence through luxury and

impoverished themselves by the reduction of money which

circulated among them, and it was this luxury that caused

their empire to pass into the hands of the eastern nations

of the Orient.

So long as Romans’ luxury (which did not begin until

after the defeat of Antiochus, King of Asia, around A.U.C.

564)93 came from the product of the land and the labor of

93

King Antiochus III the Great was ruler of the Seleucid Empire (eastern half of Alexander’s Empire

including modern Turkey to Persia and other parts of the Middle East). Antiochus was defeated by a much

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all the vast estates of their dominion, the circulation of

money only increased instead of decreasing. The public was

in possession of all the gold, silver, and copper mines in

the empire. They had the gold mines of Asia, Macedonia,

Aquileia94 and the rich mines, both gold and silver, of

Spain and other countries. They had several mints where

gold, silver and copper coins were struck. In Rome, the

consumption of all the goods and merchandise drawn from

their vast provinces did not diminish the circulation of

money, any more than the pictures, statues and jewels

themselves. Although the wealthy landlords spent excessive

amounts for their feasts, and paid 15,000 ounces of silver

for a single fish, all that did not diminish the quantity of

money circulating in Rome, given that the provinces made

tributes regularly, not to mention the money brought in by

lenders and by governors with their extortions. The amounts

annually extracted from the mines increased the circulation

in Rome during Augustus’ whole reign. However, luxury was

already on a very great scale, and there was much eagerness,

not only for curiosities produced in the empire, but also

for jewels from India, pepper and spices, and all the

rarities of Arabia. Silks, which were not made in the

larger Roman army in Greece at the Battle of Thermopylae in 191 B.C. and the decisive Battle of Magnesia

which was fought in Asia Minor in 190 B.C. (a.k.a. A.U.C. 564)

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empire, began to be in demand there. Nevertheless, the money

drawn from the mines still exceeded the sums sent out of the

empire to buy all these things. However, under Tiberius,

money became scarce when that emperor collected 2.7 billion

sesterces95 in his Treasury. To restore an abundant

circulation, he only needed to borrow 300 million on a

mortgage of his estates. After his death, Caligula spent all

of Tiberius treasure in less than one year, and it was then

that the abundance of money in circulation was at its

highest in Rome and the wind of luxury kept on blowing. The

historian Pliny96 estimated that in his time the empire

exported at least 100 million sesterces annually. This was

more than was drawn from the mines. Under Trajan, land

prices fell by one-third or more, according to the younger

Pliny, and money continued to decrease until the time of the

Emperor Septimus Severus.97 Money was then so scarce in Rome

that the emperor collected enormous quantities of wheat,

being unable to collect enough tax money for his

enterprises. Thus the Roman Empire declined through the loss

of its money before losing any of its estates. That is what

94

Founded by the Romans as a defensive outpost in northeast Italy (near Venice) it developed into a center

of commerce after gold was discovered in the region. 95

Roman money: one sesterce was worth one quarter or a ―denier.‖ Originally a small silver coin, it was

converted into a larger bronze coin during Augustus coinage reform of 23 B.C. 96

Gaius Plinius Caecilius Secundus (63-ca. 113 AD) as known as Pliny the Younger was a lawyer and

author and the great nephew of Pliny the Elder (23-79 AD). 97

Emperor of Rome from 193 to 211 A.D.

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luxury brought about, and what it always will bring about in

similar circumstances.

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Chapter Nine: Of Interest on Money and its Causes

Abstract: Interest is established in the market by

lenders and borrowers and the interest rate on a

particular loan is determined by the risk of

default. A loan is repaid from the income

generated from capital investments and the

interest paid is equivalent to the profits of

fully capitalized enterprises. Small entrepreneurs

pay high rates whether they borrow cash or

purchase goods to be paid at a later date, based

on risk and their propensity to spend beyond their

means. Thereby, interest rates on loans are

connected with an individual’s time preference.

Just as the prices of goods are set by the bargaining

process in the market and by the quantity of goods offered

for sale relative to the quantity of money offered for them,

or in other words, by the relative number of sellers and

buyers, so in the same way the interest on loans in a state

is settled by the relative number of lenders and borrowers.

Although money serves as a medium of exchange, it does

not multiply itself or earn interest simply by being in

circulation. It is the needs of mankind that seem to have

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introduced the usage of interest. A man who lends money

backed by good securities or a mortgage only runs the risk

of the ill will of the borrower, or of expenses, lawsuits,

and losses. However, when he lends without collateral, he

runs the risk of losing everything. For this reason, needy

men must have begun by tempting lenders with profit as bait

and this profit must have been proportionate to the needs of

the borrowers and the fear and avarice of the lenders. This

seems to be the origin of interest although its continued

use in states seems to be based upon the profits that

entrepreneurs can make from it.

Land aided by human labor, naturally produces 4, 10,

20, 50, 100, 150 times the amount of wheat sown, depending

on the fertility of the soil and the industry of the

inhabitants. It also produces fruits and cattle. The farmer

who runs the operation generally keeps two-thirds of the

production, with one third paying his expenses and upkeep

and the other being the profit for his enterprise.

If the farmer has enough capital for this enterprise,

such as the necessary tools, horses for plowing, cattle to

increase the value of the land,98 etc., he will keep for

himself, after paying all expenses, one-third of the farm’s

98

In the era before chemical fertilizer, cattle manure was often crucial as a fertilizer for maintaining the

productivity of agricultural land.

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production. But if a competent laborer, who lives on his

wages from day to day and who has no land, can find someone

willing to lease land or the money to buy some, he will be

able to give the lender all of the third rent, or one-third

of the production of the farm over which he will become the

farmer or entrepreneur. However, he will see his condition

improved because he will obtain his upkeep in the second

rent, and will become master instead of employee. If he can

save and do without some necessities, he can gradually

accumulate some capital and have less to borrow every year.

Eventually, he will manage to keep all of the third rent.

If this new entrepreneur can buy wheat or cattle on

credit that will be paid back long term when he sells his

farm products for money, he will gladly pay more than the

cash market price. This is the same things as if he borrowed

cash to buy wheat, with the interest paid being the

difference between the cash price and the price payable at a

future date. However, whether he borrows cash or goods,

there must be enough left over for his upkeep, or he will

become bankrupt. This risk is the reason why he will be

required to pay 20 or 30 percent profit or interest on the

amount of money or value of the goods he borrows.

In a similar manner, a master hat maker who has capital

to carry on his manufacture of hats; to rent a house, buy

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beaver skins,99 wool, dye, etc. and to pay for the

subsistence of his workmen every week, should obtain his own

upkeep from this enterprise and a profit similar to that of

the farmer who keeps one-third of his farm’s output as

profit. This upkeep and the profit should come from the sale

of the hats, the price of which ought to cover not only the

materials, but also the upkeep of the hatter and his

workmen, and also the profit in question.

A capable journeyman hatter with no capital may

undertake the same business by borrowing money and materials

and giving the profit to anybody who is willing to lend him

the money or entrust him with the beaver, wool, etc. for

which he will pay sometime later when he has sold his hats.

If, when his bills are due, the lender requires his capital

back, or if the wool merchant and other lenders will not

grant him further credit, he must give up his business, in

which case he may prefer to go bankrupt. But if he is

prudent and industrious, he may be able to show his

creditors that he has, in cash or in hats, about the same

value that he has borrowed, and they will probably choose to

continue to give him credit and be satisfied, for the time

being, with their interest or profit. In this way, he will

99

Beaver skin hats were fashionable in Europe from the mid-sixteenth to mid-nineteenth century. Beavers

were a stimulate to colonization in North America where they were nearly made extinct.

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carry on and will perhaps gradually save some capital by

cutting back upon his necessities. In this manner, he will

have less to borrow every year, and when he has collected

enough capital to conduct his business (which will always be

proportional to his sales) he will keep his entire profit

and grow rich if he does not increase his expenditures.

It is useful to observe that the upkeep of such a

manufacturer is small compared to the sums he borrows for

his business or to the value of materials entrusted to him.

Therefore, the lenders run no great risk of losing their

capital if the borrower is respectable and hard working.

However, as he may not be, the lenders will always require a

profit or interest of 20 to 30 percent of the value of their

loan. Even then, only those who have a good opinion of him

will trust him. The same inductions may be made with regard

to all the masters, artisans, manufacturers and other

entrepreneurs in the state, who carry on enterprises in

which the capital considerably exceeds the value of their

annual upkeep.

However, if a water-carrier in Paris sets himself up as

the entrepreneur of his own work, all the capital he needs

is the price of two buckets, which he can buy for one ounce

of silver, after which all his gains are profit. If he earns

50 ounces of silver a year by his labor, the amount of his

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capital or borrowing relative to his profit is 1 to 50. That

is, he will earn 5000 percent, while the hatter will earn

only 50 percent and will also have to pay 20 or 30 percent

to the lender.

Nevertheless, a moneylender will prefer to lend 1000

ounces of silver to a hat maker at 20 percent interest,

rather than lend 1000 ounces to 1000 water carriers at 500

percent interest. The water carriers will quickly spend on

their maintenance, not only the money they gain by their

daily labor, but all that is lent to them. These amounts of

capital are small compared with what they need for their

maintenance: however much or little they work, they can

easily spend all that they earn. Therefore, it is difficult

to determine the profitability of small entrepreneurs. It

may well be that a water carrier earns 5,000 percent of the

value of the buckets that are the capital of his company. He

could even earn 10,000 percent, if by hard work he earns 100

ounces of silver a year. However, because he could easily

spend 100 ounces on himself just as easily as 50, it is only

by knowing what he devotes to his upkeep that we can

determine how much clear profit has been made.

It is always necessary to deduct the subsistence and

maintenance of the entrepreneur before determining their

profit. We have done this in the example of the farmer and

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of the hat maker. However, we have shown that this is

difficult to determine in the case of the smallest

entrepreneurs, the majority of whom will eventually go

bankrupt.

Ordinarily, brewers in London will lend a few kegs of

beer to pub owners and when they pay for the first kegs,

they continue to lend them more. If these pubs do a brisk

business, the brewers can make an annual profit of 500

percent; and I have heard that the big brewers grow rich

when no more than half the pubs go bankrupt on them in the

course of the year.

All the merchants in a state are in the habit of

lending merchandise or products to retailers. They

proportion the amount of their profit or interest to that of

their risk. The risk is always considerable when the

proportion of the borrower's maintenance is high relative to

the amount of the loan. If the borrower or retailer does not

have a prompt flow of sales in his small business, he will

quickly be ruined and will spend all he has borrowed on his

own subsistence and will consequently be forced into

bankruptcy.

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The fish merchant, who buys fish at Billingsgate100 in

London to sell again in other areas of the city, generally

pays, under a contract made by a professional writer, one

shilling per guinea or per twenty-one shillings of interest

per week, which amounts to 260 percent per year.101 The

market-women in Paris, whose business is smaller, pay five

sols102

for the week's interest on an ecu103 of three livres,

which exceeds 430 percent per year.104 And yet, there are few

lenders who make a fortune from such high interest.

These high rates of interest are not only tolerated but

are in a way useful and necessary in a state. Those who buy

fish in the streets pay for these high interest rates with

an increase in the price they charge. They provide a

convenience for their customers who do not consider it a

loss. In the same manner, an artisan who drinks a beer and

pays a price that gives the brewer his 500 percent profit,

is satisfied with this convenience and does not feel the

loss of this small detail.

The Casuists, who hardly seem suitable to judge the

nature of interest and matters of trade, have created a

100

Billingsgate was the location of a fish market that developed during the sixteenth and seventeenth

centuries in the southeastern part of London, on the docks located on the north bank of the Thames River. 101

One shilling interest per twenty-shillings borrowed equals (1/21) or 4.76% per week or 248% simple

interest per year. 102

One sol was worth 1/20 of a livre. 103

A French silver coin originally worth three livres.

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concept (damnum emergens) through which they will tolerate

these high interest rates. Rather than disrupt its use and

suitability to business, they have agreed to allow those who

lend at great risk to charge a proportionally high rate of

interest. And there is no limit, for they would be at a loss

to find any definite limit because in reality, this business

depends on the fears of the lenders and the needs of the

borrowers.105

Maritime merchants are praised when they can generate a

profit from their enterprise’s capital, even though it is as

high as 10,000 percent; and whatever profit wholesale

merchants make or demand for selling products or merchandise

to smaller retail merchants on long credit, I have not heard

the Casuists declare it a crime. They are, or seem to be, a

little more scrupulous about loans of money even though it

is essentially the same thing. They even tolerate these

loans by a distinction (lucrum cessans) that they invented.

I understand this means that a man who usually makes a 500

104

Five sols interest per sixty sols borrowed (3 livres * 20 sols per livre) equals 8.3% interest per week or

433% simple interest per year. 105

The Casuists were scholastic theologians who wrote on the topic of usury. Starting from the position of

―just price‖ where any interest was illegitimate and unjust, the scholastics gradually moved towards

accepting the concept of interest, the charging of high rates of interest, and eventually to the position that

any rate determined in the market and agreed to by both parties was a just price for a loan. Cantillon

mentioned two concepts the Casuists developed, lucrum cessans and damnum emergens, which supported

the payment of interest against charges of usury. Lucrum cessans provided an exception whereby a lender

could legitimately receive interest from a borrower equal to the same return he could have made from an

alternative use of his money had he not lent it to the borrower. Similarly, damnum emergens provided an

exception whereby a lender could be compensated for any damages suffered because of the absence of the

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percent profit in his business may demand this rate when he

lends money to another. Nothing is more entertaining than

the multitude of laws and rules made in every century on the

subject of the interest of money—always unnecessarily—by

wiseacres who hardly understand the facts of commerce.

From these examples and inductions, it seems that there

are many classes and pathways of interest or profit in a

state. In the lowest classes, interest is always highest in

proportion to the greater risk, and it diminishes, from

class to class, up to the highest which is that of rich

merchants who are known to be creditworthy. The interest

stipulated for this class is called the current rate of

interest in the state and it differs little from the

interest rate charged on land mortgages. A bill of exchange

from a solvent and solid merchant is as well regarded, at

least in the short run, as a mortgage on land, because the

possibility of a lawsuit or a dispute involving the mortgage

is equivalent to the possibility of the merchant’s

bankruptcy.

If entrepreneurs in a state could not make a profit on

the money or goods that they borrow, the use of interest

would probably be less frequent than it is. Only extravagant

money lent. Both concepts justified the charging of interest and recognized the existence of the opportunity

cost of money.

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189

people and spendthrifts would contract for loans. But

accustomed as everyone is to depend on entrepreneurs, there

is a constant source for loans and consequently for

interest. Entrepreneurs are the ones who cultivate the land

and supply bread, meat, clothes, etc. to all the inhabitants

of a city. Those who work on wages for these entrepreneurs,

also seek to set themselves up as entrepreneurs, in

emulation of each other. The multitude of entrepreneurs is

much greater among the Chinese as they have a lively spirit,

a genius for enterprise, and a determination to achieve

their goals. There are among them many entrepreneurs whose

work here is done by people on fixed wages. They even supply

meals for laborers in the fields. It is perhaps this large

number of small entrepreneurs and others, from the various

classes, who earn a living from consumption without injuring

the consumer, that keeps the rate of interest for the

highest classes at 30 percent, while it hardly exceeds 5

percent in Europe. At Athens, in Solon’s time,106

interest

was at 18 percent. In the Roman Republic, it was most

commonly 12 percent, but has also been known to be 48, 20,

8, 6, and its lowest was 4 percent. It was never so low in

the free market as towards the end of the Republic and under

106

Solon (638 BC–558 BC), a foreign trader, wrote the first Constitution of Athens in which he established

a civic democracy based on wealth rather than social position or family ties. He also abolished slavery and

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Augustus after the conquest of Egypt.107 The Emperor

Antoninus108 and Alexander Severus

109 only reduced interest to

4 percent by lending public money on the mortgage of land.

serfdom and instituted trial by jury. He also eliminated all debts, which may have had an impact on interest

rates. 107

Egypt became part of the Roman Empire 31 BC. Augustus reigned from 27 BC to AD 14 and instituted

a relatively free market economy. 108

Antoninus was Roman emperor from 138 AD to 161 AD. 109

Alexander Severus, also known as Marcus Aurelius was a Roman emperor (222 AD – 235 AD)

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Chapter 10: The Causes of Increases and Decreases of the

Interest Rate on Money in a State

Abstract: The interest rate is determined by the

supply and demand for loanable funds, not the

supply of money. Savings and frugality decrease

the interest rate while lavish spending increases

it. War increases the interest rate, peace

decreases it. Paying off the national debt

decreases the interest rate. A positive balance of

trade decreases the interest rate, but the

government cannot effectively lower the interest

by a usury law. The interest rate is a critical

factor in the valuation of assets such as land.

It is a common idea, accepted by all those who have written

on commerce, that an increased quantity of money in a state

decreases the rate of interest, because when money is

abundant it is easier to find some to borrow. This idea is

not always true or accurate. For proof, we need only to

remember that in 1720, nearly all the money in England was

brought to London. In addition, the number of notes in

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circulation further accelerated the movement of money to an

extraordinarily level.110

However, this abundance of money and increased

circulation did not decrease the interest rate, which had

been running at 5 percent or lower. It only served to raise

the rate, which increased up to 50 and 60 percent. It is

easy to account for this increased rate of interest by the

principles and the causes of interest that I established in

the previous chapter. The reason is that everyone had become

an entrepreneur in the South Sea scheme and wanted to borrow

money to buy shares, expecting to make an immense profit

with which it would be easy to pay this high rate of

interest.111

If the abundance of money in the state comes from the

hands of moneylenders, the increase in the number of lenders

will probably lower the rate of interest. However, if the

abundance comes from the hands of people who will spend it,

this will have just the opposite effect and will raise the

rate of interest by increasing the number of entrepreneurs

who go into business as a result of this increased spending,

110

Cantillon is referring here to an increase in the amount of bills of exchange, what is now called the

―velocity of money,‖ during the South Sea Bubble of 1720. 111

Cantillon may have been the first author to clearly distinguish between the purchasing power of money

and the interest rate on loans. This was one of the most critical elements of Cantillon’s overall assault on

mercantilist doctrine.

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193

and will need to supply their businesses by borrowing at all

types of interest.

The abundance or scarcity of money in a state always

raises or lowers the price of everything in markets, without

any necessary connection to the rate of interest which may

very well be high in states where there is plenty of money,

and low in those where money is scarcer; high where

everything is expensive, and low where everything is cheap;

high in London, low in Genoa.

The rate of interest rises and falls every day from

mere rumors, which might decrease or increase the confidence

of lenders, without affecting the prices of product in

markets.

The most constant source for a high rate of interest in

a state is the great expenditures of nobles, property

owners, and other rich people. Entrepreneurs and master

craftsmen supply the great houses with all the elements of

this spending and entrepreneurs almost always need to borrow

money in order to supply them. When the nobles consume

beyond their income and borrow money, they doubly contribute

to raising the interest rate.

In contrast, when the nobles of the state live frugally

and buy first hand [without middlemen] as often as they can,

they will acquire many products from their servants without

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dealing with entrepreneurs. This diminishes profits and the

numbers of entrepreneurs in the state and it consequently

reduces the number of borrowers, as well as the interest

rate. Because these entrepreneurs work with their own

capital, borrowing as little as they can, and content

themselves with small profits, they prevent those who have

no capital from starting similar enterprises with borrowed

money. Such is the case today in the Republics of Genoa and

Holland, where interest is sometimes at two percent, or

lower for the upper classes. Meanwhile, in Germany, Poland,

France, Spain, England and other countries, the affluence

and expenses of noblemen and property owners has kept the

country’s entrepreneurs and master artisans accustomed to

large profits, enabling them to pay a high rate of interest,

which is higher still when they import everything from

abroad with the added risk for the enterprises.

When the prince or the state incurs heavy expenses,

such as when making war, the rate of interest increases for

two reasons. The first is that it increases the number of

entrepreneurs with several new large enterprises for war

supplies, and it therefore increases borrowing. The second

is because of the greater risk that war always brings.

On the contrary, when the war is over, risk diminishes,

the number of entrepreneurs decreases, and war-contractors

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195

who go out of business, reduce their expenditures and become

lenders of the money they have gained. In this situation, if

the prince, or state, offers to repay part of the public

debt, it will reduce the rate of interest significantly.

This will truly have an effect if part of the debt can be

paid off without borrowing elsewhere, because the repayments

increase the number of lenders in the highest class of

interest [i.e. the prime rate], which will affect all the

other classes.

When the abundance of money in the state is caused by a

continuous (positive) balance of trade, this money first

passes through the hands of entrepreneurs. And although it

increases consumption, it does not fail to lower the rate of

interest because most of the entrepreneurs will acquire

enough capital to conduct their business without borrowing,

and even become lenders of the amount they have gained

beyond what they need to operate their business. If the

state does not have a great number of nobles and rich people

who spend lavishly, the abundance of money will certainly

lower the interest rate, while increasing the price of goods

and merchandise exchanged. This is what usually happens in

republics that have neither much capital nor considerable

land, and which grow rich only by foreign trade. But in

states that have considerable capital and large property

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owners, the money brought in by foreign trade increases

their rents, and enables them to spend heavily, which

maintains several entrepreneurs and artisans besides those

who engage in the foreign trade. This always keeps interest

rates high despite the abundance of money.

When a noble or property owner ruins himself by

extravagant expenditures, the lender who holds the mortgages

on the property often acquires the absolute ownership to it.

It may also be the case in a state that lenders provide more

credit than money in circulation. In this case, they are

subordinate owners of the land, and its production, which

have been mortgaged as security. Without which, the lenders’

capital would be lost by the bankrupcy of the borrowers.

In the same manner, one may consider the owners of

public debt to be the subordinate owners of state revenues,

which is used to pay them interest. However, if the

legislature was compelled by the needs of the state to use

these revenues for other purposes, the owners of public debt

would lose everything, while the amount of money circulating

in the state would not diminish by a single coin.

If the prince or the administrators of the state want

to regulate the current interest rate by law, the regulation

must be established on the basis of the current market rate

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in the highest class, or thereabout.112

Otherwise the law

will be useless because entrepreneurs are obedient to the

forces of competition, or the current price as settled by

the proportion of lenders to borrowers, and as a result,

they will resort to secret deals. This legal constraint will

only hamper trade and raise the interest rate, instead of

fixing it. Historically, the Romans, after passing several

laws to restrict interest rates, passed one to prevent the

lending of money altogether. This law had no more success

than its predecessors. Justinian’s law, which restrained

well-to-do people from taking more than 4 percent, those of

a lower order 6 percent, and traders 8 percent, was equally

amusing and unjust, because it was not forbidden to make 50

and 100 percent profit in all sorts of enterprises.113

If it is allowable and respectable for a property owner

to lease a farm to a poor farmer at a high rent, risking the

loss of the rent for a whole year, it seems that it should

be permissible for a lender to lend money to a needy

borrower, at the risk of not only losing his interest or

profit, but also his capital, and to stipulate any interest

112

Cantillon seems to disparage usury laws in general but here stipulates that if they are used, they must

conform to the market rate of the highest class of interest. This would allow the state, property owners, and

the most trustworthy borrowers to continue to borrow without interferance. Entrepreneurs could finance

their businesses by purchases supplies and inputs where the price to be paid in the future includes a return

on interest. Private individuals could continue to borrow and easily evade the law. Therefore, usuary laws

based on market rates would cause little ―embarassment.‖

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rate that the borrower will freely consent to pay. It is

true that loans of this type can make lenders worse off;

they can lose both the interest and their capital because

they are far less likely to recoup losses compared to the

property owner who cannot lose the land he rents. Because

bankruptcy laws are relatively favorable to debtors and

allow them to start again, it seems that usury laws should

always be adjusted to market rates, as is the case in

Holland.

The current interest rate in a state seems to serve as

a basis for establishing the market price of land. If the

current rate is 5 percent or one-twentieth part, the price

of land should be the same [i.e. twenty times the amount of

interest paid per year on the mortgage of similar land].

However, because ownership of land gives a certain status

and rights in some states, it will be the case that when

interest is 5 percent or one-twentieth part, the price of

land is set at 1/24 or 1/25 [25 times], although the

mortgage rate on the same land hardly exceeds the current

interest rate.

After all, the price of land, like all other prices, is

regulated naturally by the proportion of sellers to buyers,

113

Justinian I (483AD – 565AD) was an Eastern Roman Emperor and is considered one fo the most

important of the later emperors. He is most remembered for the codification of Roman law that he initiated

and which subsequently became the basis of European legal systems.

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etc. And as there will be many more buyers in London, for

example, than in the provinces, and as these buyers who live

in the capital will prefer to buy land in their locality

rather than in distant provinces, they would rather buy land

in their vicinity at 1/30 or 1/35, than distant lands at

1/25 or 1/22. There are often other acceptable reasons

affecting land prices, unnecessary to mention here, since

they do not invalidate our explanations of the nature of

interest.114

114

Cantillon here seems to be suggesting a capital asset pricing model where the value of land is 22 to 35

times the annual interest or income derived from the land, and that the ratio is adjusted according to the

benefits of its location.

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Part Three: International Trade and Business Cycles

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Chapter One: On Foreign Trade

Abstract: Here the circular flow economy is

extended to international trade. Instead of barter

or exchange with money, Cantillon explains how

international trade takes place on the basis of

bills of exchange. He shows that a state which

accumulates money will enjoy a temporary gain in

international trade, but that states where

manufacturing industries develop will enjoy a

higher standard of living. The only clear

exception Cantillon makes to free trade is his

famous endorsement of the English Navigation Acts,

where domestic shipping is protected, not in its

own right, but to provide ships and sailors during

wartime.

When a state exchanges a small product of land for a larger

in foreign trade, it seems to have the advantage; and if

money is more abundant than abroad, it will always exchange

a smaller product of land for a greater one.

When the state exchanges its labor for foreign

products, it seems to have the advantage, because its

inhabitants are fed at the foreigner's expense.

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When a state exchanges products and labor for a larger

amount of foreign products, that require an equal or greater

amount of labor, it seems again to have the advantage.

If the ladies of Paris annually consume lace from

Brussels valued at 100,000 ounces of silver, it will require

a quarter of an acre of land in Brabant, to grow the 150

pounds of flax necessary to make the fine lace in Brussels.

It will require the labor of approximately 2,000 people in

Brabant during the year for the several tasks involved, from

the sowing of the flax to the final perfection of the lace.

The lace merchant or entrepreneur in Brussels will advance

the capital. He will, directly or indirectly, pay all the

spinners and lace-makers, and a portion of the labor of

those who make their tools. All those who have taken part in

the work will then buy, directly or indirectly, their

sustenance from the farmer in Brabant, who will use the

money to cover part of his rent to the property owner. In

this economy, if one estimates that these 2000 persons need

three acre of land per capita for their maintenance as well

as that of their families, then six thousand acre of land in

Brabant will be required to support those who have worked on

the lace, at the expense of the ladies in Paris who will buy

and wear the lace.

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The ladies of Paris will pay the 100,000 ounces of

silver, each according to the quantity of lace she has

bought. All this silver must be sent to Brussels in specie,

less only the cost of shipping. The entrepreneur in Brussels

must find that it not only pays of all his advances and the

interest on the money that he has perhaps borrowed, but also

a profit for his enterprise and the upkeep of his family. If

the price paid by the ladies for the lace does not cover all

the costs and profits, there will be no incentive for this

business, and the entrepreneurs will cease production or

become bankrupt. However, if we assume that this

manufacturing continues, all costs must be covered by the

prices paid by the ladies of Paris, and that 100,000 ounces

of silver must be sent to Brussels, if the people of Brabant

receive no commodities from France as compensation.

However, if the inhabitants of Brabant are fond of

Champagne115 wine and consume 100,000 ounces of silver worth

of wine every year, the wine products will compensate for

the lace, and the balance of trade for these two branches

will be equal. This compensation and circulation will be

achieved through entrepreneurs and bankers who will

participate in this trade.

115

Region of France located just east of Paris.

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The ladies in Paris will pay 100,000 ounces to whoever

sells and delivers the lace to them; the seller will then

give the money to a banker who, in exchange, will give him

one or more bills of exchange116 redeemable by the

institution’s correspondent bank in Brussels. The Paris

banker will then give the money to the Champagne wine

merchants who have accumulated 100,000 ounces of silver in

the Brussels bank. In return, the wine merchants give the

Paris bank their bills of exchange—of the same amount—to be

redeemed from their account with the correspondent bank in

Brussels. Thus the 100,000 ounces paid for the Champagne

wine in Brussels will compensate for the 100,000 ounces paid

for the lace in Paris, and in this way, the trouble of

sending to Brussels the money acquired in Paris, and to

Paris the money acquired in Brussels, will be avoided. This

compensation is achieved by using bills of exchange, the

nature of which I will try to explain in the next chapter.

From this example, we can see that the 100,000 ounces

paid by the ladies of Paris for lace comes into the hands of

the merchants who send Champagne wine to Brussels; and that

the 100,000 ounces consumers paid for Champagne wine in

Brussels comes into the hands of lace merchants. The

116

A check or bank draft used in international trade that is an order written by one person to pay another a

specific sum on a specific date in the future. In this case the Paris bank is giving the lace dealer a bill of

exchange that can be cashed at the Brussels bank.

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entrepreneurs on each side distribute this money to those

who work for them, either in the wine or the lace business.

It is clear from this example that the ladies in Paris

support and maintain all those who produce the lace in

Brabant and that they cause money to circulate there. It is

also clear that the consumers of Champagne wine in Brussels

support and maintain, in Champagne, not only the winemakers

and others who work in the production of the wine, but also

the wagon makers, blacksmiths, and wagon drivers, etc. who

take part in its transport, as well as the horses they use.

They also pay for the value of the land used to produce the

wine, and cause a circulation of money in Champagne.

However, this circulation or trade in Champagne, which

is so stimulating and which maintains the winemaker, the

farmer, the wagon makers, blacksmiths, and wagon drivers

etc., and which pays the rent of the vineyard owner as well

as that of the owner of the pastures that serve to feed the

wagon horses, is, in the present case, an expensive and

disadvantageous trade for France when taking the effects it

produces into consideration.117

117

French apparell and luxury goods industries were highly regulated and monopolized by French

mercantile policy during this time period so that such luxury goods had to be imported even though France

probably had a comparative advantage in them.

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206

If a barrel of wine118 sells for sixty ounces of silver

in Brussels and if we assume that one acre of vineyard

produces four barrels, the production of 4166.5 acres of

land must be sent to Brussels to equal 100,000 ounces of

silver, and about 2000 acres of pasture and cropland must be

employed for the hay and oats consumed by the wagon horses,

if they are solely used for this purpose year round.

Therefore, approximately 6000 acres of land will be

relinquished from the subsistence of Frenchmen and the

people of Brabant will gain the production of over 4,000

acres, since the Champagne wine they drink saves them more

than 4,000 acres of land they would likely use to produce

beer, if they did not consume wine. However, the lace used

to pay for all this costs the people of Brabant only one

quarter of an acre of flax. Therefore, with the production

of one acre--combined with their labor--the people of

Brabant buy more than 16,000 acres worth (combined with less

labor) from the French. They obtain an increase in

subsistence and only give an article of luxury, which brings

no real advantage to France since the lace is worn and

consumed and cannot be exchanged for anything useful

afterward. Following the rule of intrinsic values, the land

used in Champagne for wine production, the maintenance of

118

A ―muid‖ or barrel of wine contains 288 pints or 36 US gallons.

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the winemakers, the coopers, the wagon makers, blacksmiths,

wagon drivers horses, etc., ought to equal the land used in

Brabant for the production of the flax, the support of the

spinners and lace makers, and all those who have taken part

in the production of the lace.

But if money in circulation is more abundant in Brabant

than Champagne, land and labor will be at higher prices

there and, as a result of the valuation in terms of money

that takes place on both sides, the French will lose even

more.119

In this example, we see a branch of trade that

strengthens the foreigner, lessens the number of inhabitants

in the state, and, without causing any money in circulation

to leave, weakens this same state. I’ve chosen this example

to better show how one state may be the dupe of another in

trade, and to show the method of judging the advantages and

disadvantages of foreign trade.

It is by the examination of the effects of each

particular branch of commerce that foreign trade can be

usefully regulated.120 It cannot be distinctly known with

generalizations.

119

Cantillon would later show that there is a market mechanism that regulates the flow and circulation of

money between nations. However, France suffered several bouts of artificial shortages of money resulting

from attempts to exploit money holders by the monarchy. 120

The word ―regulated‖ does not imply government regulation of international trade. When Cantillon used

the word ―régler‖ he was usually refering to some form of market harmonization ala supply and demand.

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One will always find, when examining particular cases,

that the exportation of any manufactured goods is

advantageous to the state because the foreigner always pays

and supports workers who are useful to the state. The best

returns or payments which one receives are in specie, and in

default of specie, foreign products that require less labor.

By these trading methods, states that have very little raw

materials can support a large number of inhabitants at the

expense of foreigners, and large states can maintain their

inhabitants in greater ease and abundance.121

Great states have no need to increase the number of

their inhabitants; they only need to support their citizens

with domestic production, and in more ease and comfort, and

to increase the strength of the state in terms of defense

and security. To achieve the same result by foreign trade,

the exportation of the state’s products and manufactured

goods must be strongly encouraged, in exchange—as often as

possible—for gold and silver. If an abundant harvest creates

a surplus of production in the state above the usual annual

consumption, it would be advantageous to encourage its

exportation in return for its value in gold and silver.

These metals are non-perishable, they do not spoil like

121

Cantillon has previously demonstrated why manufacturing workers receive higher wages than unskilled

workers and how those wage rates are harmonized by market forces.

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209

agricultural products, and gold and silver can always be

used to import into the state what it does not have.

However, it would not be advantageous for the state to

annually send great quantities of its agricultural products

abroad in return for foreign manufactured goods. This would

both weaken and decrease the number of inhabitants and the

armed forces of the state.

It is not my intention to describe the branches of

trade that should be encouraged for the good of the state.

I’ll simply say that the importation of money should be the

goal.

An increase in the quantity of money circulating in a

state provides great advantages in foreign trade, so long as

this abundance of money lasts. This allows the state to

exchange a small quantity of products and labor for a

greater one. It levies its taxes more easily and finds no

difficulty in raising money in case of public need.

It is true that the continued increase of money will,

in time, and by its abundance, cause land and labor costs to

rise in the state. Products and manufactured goods will, in

the long run, cost so much that the foreigner will gradually

cease to buy them, and will adjust to buying them cheaper

elsewhere. By imperceptible degrees, this will ruin the

businesses and manufactures of the state. This same cause

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210

(the abundance of money) will raise the rents of property

owners and will put them into the habit of importing many

articles from foreign countries where they can be purchased

for less. These are natural consequences. The wealth

acquired by a state through trade, labor, and economy will

gradually plunge it into luxury.122

States that rise by trade

do not fail to sink afterwards. There are steps that might

be, but are not, taken to stop this decline. But it is

always true that when the state has a positive balance of

trade and an abundance of money, it seems powerful, and it

really is as long as this abundance continues.

Infinite inductions could be added to justify these

ideas of foreign trade and the advantages of abundant money.

The disproportion of money in circulation in England and in

China is astonishing. Despite an eighteen months sea

voyage, goods from the Indies, like silks, colored calicoes,

muslins, etc. sell for a very low price in England, and

could be paid for with the thirtieth part of her articles

and goods, if the Indians would buy them. But they are not

so foolish as to pay extravagant prices for our products

while work is done better and infinitely cheaper in their

own country. So they sell us their goods only for cash

122

Cantillon was not opposed to luxury goods and fine living. Indeed he seemed to be a luxury goods

enthusiast. When he uses the term luxury what he seems to be refering to decadence and living beyond

one’s means.

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211

money, which we annually carry to them, increasing their

wealth and diminishing our own.123

Indian goods consumed in

Europe only reduce our money and the work done by our own

manufactures.

A [Native] American who sells beaver skins to a

European is surprised, and rightly so, to learn that woolen

hats are as good as those made of beaver, and that all the

difference, which causes so long a sea journey, is in the

mind of those who think that beaver hats are lighter and

more pleasant to the eye and the touch. However, as these

beaver skins are ordinarily paid for to the American in

articles of iron, steel, etc. and not in money, this trade

is not injurious to Europe, especially since it supports

workers and particularly sailors, who are very useful to the

state, while the commerce of goods from the East Indies

exports money and diminishes the number of workers in

Europe.

It must be acknowledged that the East Indian trade is

profitable to the Dutch Republic and that she makes the loss

fall on the rest of Europe by selling the spices and goods

in Germany, Italy, Spain and the New World, for a profit

well beyond the amount she sends to the Indies. Holland even

finds it useful to clothe her women and other inhabitants

123

Asians have traditionally saved by accumulating jewelry made of precious metals (see Rissman 1988).

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212

with Indian fabrics rather than with English or French

fabrics. It suits the Dutch better to enrich the Indians

rather than their neighbors, who could use it to oppress

them. Moreover, they sell the cloths and small manufactured

goods that they produce to other Europeans for more than

what they pay for the Indian goods consumed in Holland.

England and France would be mistaken to imitate the

Dutch in this respect. These kingdoms have the means to

clothe their women with their own products, and though their

fabrics are more expensive than Indian made ones, they

should prevent their people from wearing foreign fabrics.

They ought to prevent a reduction of their own articles and

goods and not become dependent on the foreigner, still less

allow their money to be taken away for that purpose.124

But as the Dutch find means to sell Indian goods in the

other states of Europe, English and French should do the

same, whether to reduce Holland’s naval power or to increase

their own, and above all, to do without Holland’s aid in the

branches of consumption that a bad habit has made necessary

in these kingdoms. It is a visible disadvantage to allow the

wearing of Indian fabrics in the kingdoms of Europe that

124

France was practicing a severe form of mercantilism at the time, which, among other things, made the

manufacture of cloth and fabric very expensive; the industry was tightly regulated and heavily

monopolized. For example, the type of cotton fabrics that were being imported into Europe and smuggled

into France—printed cotton calicos—were prohibited from being manufactured in the country (see Ekelund

and Tollison, 1981).

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213

have the means to clothe their people with their own

products.125

Just as it is disadvantageous for a state to encourage

foreign manufactures, so it is also to encourage foreign

navigation. When a state sends its articles and goods

abroad, it can obtain the full advantage if it sends them in

its own ships. This way, trade supports a large number of

sailors, who are as useful to the state as workers. If it

leaves ocean transportation to foreign vessels, it

strengthens foreign navies and weakens its own.126

Navigation is an essential aspect of foreign trade. In

all of Europe, the Dutch are those who build ships the

cheapest. In addition to the rivers that they use to float

timber downstream, their proximity to the north127 supplies

them with less expensive masts, wood, pitch, rope, etc.

Their mills for sawing wood facilitate the production. In

addition, they navigate with smaller crews and their sailors

live very cheaply. One of their windmills for sawing wood

saves the labor of eighty men a day.

125

This would appear to be an implied criticism of French mercantile policy that restricted the production

of certain fabrics in an age when direct criticism of the monarchy would land you in jail or worse. 126

This was a time period when England, France, Holland, and Spain were all involved in a mercantilist

war, each vying to dominate the world’s oceans, colonies, and trade routes. A most important component of

a country’s navy was its merchant marine, which could easily be transformed into commerce raiders during

a war. A nation that lacked a merchant marine would be greatly disadvantaged. 127

Here Cantillon is probably referring to the lowland countries of Belgium and Holland, the area now

known as Germany, as well as the Kingdoms of Denmark and Sweden.

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214

With these advantages, they would be the only sea

carriers in Europe if cost alone mattered. And if they had

enough resources to develop an extensive commerce, they

would doubtless have the most flourishing merchant marine in

Europe. However, their large number of sailors is not

sufficient to make them a superior naval power because their

state lacks internal strength. Even if they had the large

revenues necessary to build and man war vessels, they would

not do so because they profit from the expansion of trade.128

In order to prevent the Dutch—with their low-cost

advantage—from expanding their shipping business, England

has forbidden any nation from importing goods that it did

not produce. This precludes the Dutch from shipping to

England and thereby strengthens the English shipping

business. The English do ship at a greater cost than the

Dutch, but the wealth of their overseas cargoes offsets some

of these costs.129

France and Spain are maritime states that have a large

part of their production sent to the north, from which they

also acquire goods and merchandise. It is not surprising

128

It is important to understand that the merchant marine was a vital component of a nation’s naval forces.

In times of war, a nation’s merchant ships could be converted into commerce raiders and these raiders

could, and often did, cripple an opponent’s ability to engage in international commerce and to resupply its

Armies overseas. 129

Cantillon is endorsing the English Navigation Acts which targeted Dutch shipping and increased the

merchant marine of the British empire. This endorsement, which was latter echoed by Adam Smith, is not

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215

that their navies are insignificant in proportion to their

production and the extent of their coasts, since they leave

it to foreign vessels to import all the goods they receive

from the north and to export the goods they send to northern

states.

These states, France and Spain, do not take

advantageous trade considerations into account in their

policy. Most merchants in France and Spain who deal in

foreign trade are usually the agents or clerks of foreign

merchants, and are not entrepreneurs carrying on trade with

their own funds.

It is true that northern states, by their location and

proximity to countries that produce all that is needed for

shipbuilding, are in a position to transport everything

cheaper than France and Spain. However, this should not

prevent these two kingdoms from taking steps to strengthen

their shipping. England has long shown them the example.

They have at home and in their colonies all that is needed

for the construction of ships and it would not be difficult

to get ships built there. There are a variety of methods

that could be used to make such a policy successful if the

legislature or state department would work towards that

made on the basis of protecting domestic shipping, but as a measure that would help ensure that there

would be enough sailors and ships in times of war.

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216

goal. My subject does not allow me, in this essay, to

examine these methods in detail. I will simply say that in

countries where trade does not support a large number of

ships and sailors, it is almost impossible for the prince to

maintain a flourishing navy without ruining the state

treasury with large expenditures.

I will conclude by pointing out that the most important

form of trade for the increase or decrease of a state’s

power is foreign trade. The domestic trade is not equally

important politically. Foreign trade is only half heartedly

supported when attention is not paid to increasing and

maintaining large merchants who are natives of the country,

ships, sailors, workers and manufacturers. Above all, a

balance of trade must be maintained against the foreigner.

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217

Chapter Two: On Bills of Exchanges and their Nature

Abstract: There is an expense associated with

transporting money based on the distance, risks,

and other transaction costs. Bills of Exchange are

a type of contract that can reduce this cost by

avoiding shipments that are offsetting between two

locations. When money must be sent, bankers charge

a fee for arranging the shipment and providing

their customers with a bill of exchange, or check,

that can be drawn or cashed at a correspondent

bank where the money is sent. When the exchange

rate is above par, it indicates a balance of

payments deficit and when the exchange rate is

below par, it indicates a balance of payments

surplus.

In the city of Paris, transporting money from one place to

another usually costs five sols per bag of 1000 livres.130 If

it were necessary to carry it from the Faubourg St. Antoine

to the Invalides,131

it would cost more than twice as much,

130

The livre tournois was equal to 20 sols so that the transport charge would be ¼ livre or 2.5 one

hundreths of one percent. 131

Faubough Saint Antoine was a suburb of Paris to the east and north of the River Seine. Hôtel des

Invalides was a complex of buildings founded in 1671 by Louis XIV who was providing housing for

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218

and if there were no generally trustworthy money couriers,

it would cost even more. If there were likely to be robbers

on the road, the money would be sent in large amounts, with

an escort, at greater cost, and when someone bares the cost

and risks of transport, he will require payment in

proportion to these costs and risks. Therefore, the cost of

transport from Rouen132 to Paris and from Paris to Rouen

generally amounts to 50 sols per bag of 1000 livres,133

which, in the language of the bankers, is 1/4 percent.

Bankers generally send money in strongboxes134 which robbers

have difficulty taking because of the iron and the weight,

and as there are always mail coaches on this route, the

costs are negligible on large sums sent between these two

places.

Assume that, every year, the city of Châlons-sur-

Marne135

pays 10,000 ounces of silver to the king’s tax

collector, and wine merchants from Châlons and the

surrounding areas sell to Paris, through their distributors,

Champagne wine for a total of 10,000 ounces of silver. If

the ounce of silver is worth five livres in France, the

disabled war veterans. At the time, it was located in western Paris south of the River Seine, but is now east

of the Eiffel Tower. 132

Rouen is located in the province of Normandy near Paris. 133

The 50 sols was the equivalent of two and a half livres or one quarter of one percent. 134

Cantillon uses a phrase that translates literally as double barrels which Higgs translated as ―strong kegs‖. 135

Châlons-sur-Marnes was renamed Châlons-en-Champagne in 1998 and is the capital of the Champagne-

Ardenne region.

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10,000 ounces in question will be worth 50,000 livres in

both Paris and Châlons.

The tax collector, in this example, has 50,000 livres

to send to Paris, and the distributors have 50,000 livres to

send to Châlons’ wine merchants. This double transaction, or

transport, may be avoided by an exchange contract known as

bills of exchange, if the parties get together and arrange

for it.

In this example, let each wine distributor take his

portion of the 50,000 livres to the cashier of the tax

collector’s office in Paris and in return he will be given a

check or bill of exchange payable to the Châlons’ tax

collector. When these checks are endorsed and transferred to

the Châlons’ tax office, the tax obligations of the Châlons’

wine merchants of 50,000 livres will be paid. In this

manner, the 50,000 livres in Paris will be paid to the

cashier of the tax department in Paris and the wine

merchants of Châlons will, in effect, be paid, and by this

exchange or offset, the trouble of sending this money from

one city to the other is avoided. Or else, let Châlons’ wine

merchants, who have 50,000 livres in Paris, offer bills of

exchange from their distributors to their tax collector and

endorse them to the cashier of the tax office in Paris, who

will in turn collect from the distributors the amount of

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220

50,000 livres, which they owed to the merchants of Châlons

for the bills of exchange. Whichever way this offsetting is

achieved, whether the bills of exchange are drawn from Paris

on Châlons or, as in this example, from Châlons on Paris,

ounce for ounce, or 50,000 livres for 50,000 livres, is

paid, and the exchange is said to be at par.

The same method might be adopted between Châlons’ wine

merchants and the rent collector for the nobility in Paris

who own land in the Châlons district, and the wine

merchants, or other merchants in Châlons who have sent goods

or merchandise to Paris and have money there, and other

merchants who have purchased goods from Paris and sold them

in Châlons. If there is a large trade between these two

cities, bankers will set up in Paris and Châlons, they will

enter into relationships with the interested parties on both

sides, and will become the agents or intermediaries for the

payments that would otherwise have to be sent from one city

to the other. Now if all the wine and other goods and

merchandise, which have been sent from Châlons to Paris and

have actually been sold there for cash, exceed in value the

total receipts of the taxes in Châlons, plus the rents from

Paris’ nobility owning property in the Châlons district, as

well as the value of the goods and merchandise sent from

Paris to Châlons and sold there for cash, by 5,000 ounces of

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221

silver or 25,000 livres, it will be necessary for the banker

in Paris to send this amount to Châlons in cash. This sum

will be the excess or balance of trade between these two

cities. This sum must be sent to Châlons in cash and this

operation will be carried out in the following way or in

some similar fashion.

The agents or distributors of the Châlons’ wine

merchants, and others, who have sent goods or merchandise to

Paris, have money from these sales in Paris and that must be

sent to Châlons. They are not in the habit of transporting

the money—at risk—and will go the tax office’s cashier to

obtain a check or bill of exchange (generally at par) for

the tax office in Châlons, up to the amount which it has

available in Châlons. If they need to send additional sums

to Châlons, they will go to the banker who has, at his

disposal, the rents of the Paris nobility who own estates in

that district. This banker will furnish them, like the tax

office’s cashier, with bills of exchange to be cashed with

his correspondent banker in Châlons, up to the amount which

he has at his disposal and that must otherwise be sent from

Châlons to Paris. This offsetting will also be made at par

between the agents who request that their money be sent to

Châlons, as well as from the nobility who ask to have their

money brought to Paris from Châlons, unless the banker tries

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222

to make a small profit from the transaction for his trouble.

If the banker also has at his disposal money in Châlons from

the sale of the merchandise imported from Paris, he will

also furnish bills of exchange for this amount.

However, in our example, the agents for the Châlons’

merchants still have 25,000 livres in Paris, which they must

send to Châlons, in addition to all the sums mentioned

above. If they offer this money to the tax office’s cashier,

he will reply that he has no more funds in Châlons, and that

he cannot supply them with bills of exchange or checks to

that city. If they offer the money to the banker, he will

tell them that he has no more funds in Châlons from which he

can draw, but if they will pay him three percent of the

exchange, he will provide a bill of exchange. They will

offer one or two percent, and will settle at two and half,

unable to do better. At this price, the Banker will give

them bills of exchange, that is if they pay him two livres

ten sols in Paris, he will supply a bill of exchange for 100

livres to be cashed by his correspondent bank in Châlons,

payable in 10 or 15 days, so as to put his correspondent in

a position to make the 25,000 livres payment he is obtaining

from him. At this rate of exchange, he will send him the

money by messenger or stagecoach in gold or, in absence of

gold, in silver. This delivery of gold will cost ten livres

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223

for each bag of 1,000 livres, or in banker’s jargon, one

percent. He will pay his correspondent in Châlons a

commission of five livres per bag of 1,000 livres, or one

half percent, and he will keep one percent for his own

profit. On this basis, the exchange between Paris and

Châlons is at two and half percent above par, because one

pays two livres ten sols for every 100 livres exchanged.

In a similar manner, the balance of trade is

transported from one city to the other through bankers, and

generally on a large scale. Not all those who bear the name

of bankers are accustomed to these transactions, and many of

them deal only in commissions and bank speculations. I will

only count among bankers those who transmit money. They are

the people who regulate such exchanges, where the price is

based on the costs and risks of transporting currencies in

different cases.

The exchange premium between Paris and Châlons is

rarely more than two and half or three percent over or under

par. But from Paris to Amsterdam, the exchange premium will

be up to five or six percent when currencies have to be

sent. The journey is longer, the risk is greater, and more

correspondents and commission agents are involved. From

India to England, the price for transport will be ten to

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224

twelve percent. From London to Amsterdam, the exchange

premium will hardly exceed two percent in times of peace.

In our present example, it could be said that the

exchange in Paris for Châlons is two and half percent above

par, and in Châlons, it could be said that the exchange for

Paris is two and half percent below par, because in these

circumstances, those who provide money in Châlons for a bill

of exchange for Paris will give only 97 livres 10 sols to

receive 100 livres in Paris. And it is evident that the city

or place where the exchange is above par is in debt to that

where it is below par, as long as the exchange premiums

continue on this basis. Exchanging money from Paris to

Châlons is two and half percent above par because Paris is

in debt to Châlons and the money for this debt must be

transported from Paris to Châlons. This is why when the

exchange premium is commonly below par in one city as

compared with another, it may be concluded that this first

city has a balance of trade with the other.136 When the

exchange premium in Madrid or Lisbon is above par for all

136

Higgs wrote that ―when exchange is commonly seen to be below par in one city as compared with

another it may be concluded that this first city owes a balance of trade to the other.‖ This would be a

mistake as the first city has a positive balance of trade in that it provided the other city more goods than it

received and is owed this balance. The mistake is also in the original French edition. Hayek attributes the

mistake to a printers error, which is possible, but not as likely as an error by a manuscript copiest. We have

strong reasons to believe the French edition is not based on Cantillon’s own manuscript, but on a copy.

This is a common error, but it is highly unlikely that Cantillon himself would make such an error because

of his familiarity with and experience in these markets.

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225

other countries, it shows that these two capitals must send

specie to these other countries.

[Insert Châlons Balance of Trade with Paris here]

In all places and cities that use the same money and

the same gold and silver specie like Paris and Châlons-sur-

Marne, or London and Bristol, the exchange premium is known

and expressed by giving and taking a certain percent above

or below par. When 98 livres are paid in one place to

receive 100 livres in another, it is said that exchange

premium is about two percent below par. When 102 livres are

paid in one place to receive only 100 livres in another, it

is said that the exchange premium is exactly two percent

above par. When 100 livres are given in one place for 100

livres in another, it is said that the exchange is at par.

There is no difficulty or mystery in all this.

When the regulation137 of exchange occurs between two

cities or places where the money is different, where the

coins have different sizes, fineness, forms, and names, the

nature of exchange seems at first more difficult to explain,

though in reality, this exchange differs from that between

137

Remember that when he uses the work regulation he is not speaking of government regulation, but of

market regulation.

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226

Paris and Châlons only in the jargon used by bankers. In

Paris, one speaks of the Dutch exchange premium by reckoning

the écu (equal to three livres) against so many Dutch

deniers, but the parity of exchange between Paris and

Amsterdam is always 100 ounces of gold or silver against 100

ounces of gold or silver of the same weight and fineness.

One hundred and two ounces paid in Paris to receive 100

ounces in Amsterdam always comes to two percent above par.

The banker who transports the balance of trade must always

know how to calculate parity. But in the language of foreign

exchange, the price of exchange in London with Amsterdam is

made by giving a pound sterling in London to receive 35

escalins at a Dutch bank: with Paris, by giving 30 deniers

or pence sterling in London to receive one écu or three

livres tournois in Paris. This way of speaking does not

reveal whether exchange is above or below par, but the

banker who transmits the balance of trade understands it and

knows how much foreign money he will receive for specie of

his own country, which he is transporting.

Whether we fix the exchange premium in London for

English silver in rubles from Moscow, in Marks from Hamburg,

in Rixdollars138

from Germany, in Livres from Flanders, in

138

Rixdollar was the English term for silver coins used throughout northern Europe which were originally

based on the Reichsthaler. The Reichsthaler was a standard thaler of the Holy Roman Empire and the

mispronouciation of thaler in the American colonies is the basis for the word ―dollar.‖

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227

Ducats from Venice, in Piastres from Genoa or Leghorn,139 in

Millreis or Crusadoes from Portugal, in Pieces of Eight from

Spain, or Pistoles, etc., the parity of exchange for all

these countries will be always 100 ounces of gold or silver

against 100 ounces; and if, in the language of exchange, one

gives more or less than this parity, it is the same as

saying that the exchange is so much above or below par, and

we will always know whether or not England owes a balance to

the place with which the exchange is settled, just as we

know in our example between Paris and Châlons.

139

The city of Livorno Italy, just southeast of Genoa on the Mediterranean Sea.

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228

Châlons Balance of Trade with Paris

Paris Châlons

30,000 oz. silver Wine from Châlons

-5,000 oz. silver Parisian goods

-10,000 oz. silver paid in taxes

-10,000 oz. silver paid in rents

5,000 oz. silver balance of trade owed to Châlons

Châlons wineries sell 30,000 oz. of silver worth of wine to

the people of Paris who, in turn, sell the people of Châlons

5,000 oz. of goods. Of the 30,000 oz. on account in Paris,

5,000 oz. are transferred to the merchants who sold goods

to the people of Châlons, 10,000 is transferred to the

government to pay the taxes for the people of Châlons, and

10,000 oz. are transferred to the property owners living in

Paris to pay the rents they are owed. All this is done by the

use of bills of exchange. The remaining 5,000 oz. must be

paid in silver, which must be physically moved from Paris

to Châlons. Châlons has a balance of trade and Paris owes a

balance of trade. The banker gives bills of exchange to the

wine merchants for a 2.5% fee who in turn sends them to

the winery owners who can then cash them at local banks

after the silver arrives from Paris.

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Chapter Three

Further Explanations on the Nature of Exchanges

Abstract: Exchange rates are explained as a

function of the balance of trade and other

factors. A trade deficit can cause your money to

exchange below par, while a trade surplus will

cause it to exchange above par. In fact, the

exchange rate, above and below par, is an

indicator of the general balance of trade in a

country. An attempt to prohibit the export of gold

necessary to pay for deficits only hurts the

economy.

We have seen that exchanges are regulated by the intrinsic

value of specie, i.e. at par, and that their variation

arises from the costs and risks of transporting money from

one place to another when a balance of trade has to be sent

in specie. There is no need for reasoning with something we

can observe in fact and practice. Bankers sometimes

introduce refinements into this practice.

If England owes France 100,000 ounces of silver for the

balance of trade, if France owes 100,000 ounces to Holland,

and Holland 100,000 ounces to England, these three amounts

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230

may be offset by bills of exchange between the respective

bankers of these three states, without the need to send

silver on any side.

If Holland sends goods worth 100,000 ounces of silver

to England in January and England only sends goods worth

50,000 ounces to Holland during the same month (I’m assuming

that the sale and payment are made in January on both

sides), a balance of trade of 50,000 ounces will be due to

Holland, and the exchange rate with Amsterdam, in January,

will be two or three percent above par in London, or in the

language of exchange, the exchange rate with Holland, which

was at par or at 35 escalins to the pound sterling in London

in December, will rise to about 36 escalins in January.

However, after the bankers send this balance of 50,000

ounces to Holland, the exchange rate with Amsterdam will

naturally fall back to par in London, or to 35 escalins.

However, an English banker may foresee in January, if

an extraordinary quantity of goods is being sent to Holland,

that Holland will owe a considerable amount to England at

the time of payment in March. Instead of sending the 50,000

écus or ounces due to Holland in January, he may provide

bills of exchange on his Amsterdam correspondent bank that

will be payable two months later. By this method, he will

profit on the exchange, which was above par in January and

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231

will be below par in March, and gain doubly without sending

a sol to Holland.

This is what bankers call speculations, which often

cause variations in the exchange rates for short periods of

time, independently of the balance of trade. In the long

run, however, we must return to this balance which makes the

rules of exchange constant and uniform. And though the

speculations and credits of bankers may sometimes delay the

transport of the sums that one city or state owes to

another, in the end, it is always necessary to pay the debt

and send the balance of trade in specie to the place where

it is due.

If England regularly gains a balance of trade with

Portugal and always loses a balance with Holland, the

exchange rate premium between Holland and Portugal will make

this evident. In London, the exchange rate with Lisbon will

be below par as Portugal is in debt to England. It will also

be evident that the exchange rate with Amsterdam is above

par because England is in debt to Holland. However, the

amount of the debt cannot be seen from the exchange rates.

It cannot be seen whether the balance of silver withdrawn

from Portugal will be greater or less than what has to be

sent to Holland.

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However, there is one thing which will always be

apparent in London, whether England gains or loses the

general balance of her trade (the general balance should be

understood as the net balance between England and all the

foreign states which trade with her), as seen in the price

of gold and silver, but especially of gold (now that the

proportion between gold and silver in coined money differs

from the market rate, as will be explained in the next

chapter). If the price of gold in the London market, which

is the center of English trade, is lower than the price at

the Tower140 where guineas

141 or gold coins are minted, or at

the same price as these coins intrinsically, and if gold is

taken to the Tower in exchange for their value in guineas or

minted coins, it is a certain proof that England is a gainer

in the general balance of her trade. It proves that the gold

taken from Portugal suffices not only to pay the balance

which England sends into Holland, Sweden, Muscovy,142

and the

other states where she is indebted, but that there remains

some gold to be sent to the Mint, and the amount or sum of

this general balance of trade is known from the amount of

specie coined at the Tower of London.

140

The Tower refers to the Tower of London where the mint was housed. 141

A gold coin nicknamed after the place in Africa where much of the gold came from. 142

This refers to Moscow or the Grand Dutchy of Moscow, but by Cantillon’s time it was used to describe

the Russian Empire of Peter the Great.

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But if gold is sold in the London market above the

Tower price, which is usually £3.18.0 an ounce, the metal

will no longer be taken to the Mint, and this is a certain

sign that not enough gold is being received from abroad

(from Portugal for instance) compared to the amount

necessary to send to other countries that England is in debt

to. This is proof that the general balance of trade is

against England. However, this would not be known except for

the prohibition in England against sending gold coins out of

the country. This prohibition is the reason why the timid

London bankers prefer to buy gold metal (which they are

allowed to send abroad) at £3.18.0 up to £4 an ounce for

export rather than sending out guineas or gold coins at

£3.18.0 illegally at the risk of confiscation. Some of them

take this risk, others melt the gold coins to send out as

bullion, so that it is impossible to judge how much gold

England loses when the general balance of trade is against

her.

In France, they deduct the cost of minting, which is

usually 1.5 percent. In other words, the price for coins is

always higher than that of uncoined metal. To know whether

France loses in the general balance of her trade, one only

needs to know whether bankers send French coins abroad. If

they do so, it is a proof that they cannot purchase enough

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bullion to export, since the bullion, though at a lower

price than coined money in France, is of greater value than

these coins in foreign countries by at least 1.5 percent.

Exchange rates rarely diverge from the balance of trade

between one country and all others, and this balance is

merely the difference in value between the commodities and

merchandise which a state sends to other countries and

receives from them. Yet, there are often circumstances and

incidental causes for which considerable sums are conveyed

from one state to another aside from the question of

merchandise or trade, and these causes affect the exchange

rates just as the balance of trade would do.

The sums of money which one state sends into another

for its secret services and political purposes, subsidies to

allies, the upkeep of troops, ambassadors, noblemen who

travel, etc., the capital which the inhabitants of one state

send to another to invest in public or private projects, the

interest which these inhabitants receive annually from such

investments, etc. are all of this nature. The exchange rates

fluctuate with all these incidental causes and follow the

same rule as the transportation of money. In considering the

balance of trade, matters of this kind are not separated,

and indeed it would be very difficult to separate them. They

have most certainly an influence on the increase and

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235

decrease of money circulating in a state and on its

comparative strength and power.

My subject does not allow me to further develop the

effects of these incidental causes: I confine myself always

to the simple views of commerce so as to not complicate my

subject, which is already complex by the multiplicity of

related facts.

Exchange rates rise more or less above par in

proportion to the greater or smaller costs and risks of

transporting money. That being said, they naturally rise

much more above par in cities or states where it is

forbidden to export money than in those where its export is

free.

Assume that Portugal annually consumes considerable

quantities of woolen and other manufactured goods from

England, for its own people as well as for those of Brazil.

It pays for them partly in wine, oils, etc., but for the

surplus payment, there is a regular balance of trade sent

from Lisbon to London. If the king of Portugal strictly

prohibits under penalty, not only of confiscation but also

of life, the transport of any gold or silver out of his

states, the terror of this prohibition will, in the first

place, stop the bankers from sending the balance. The money

for English manufactures will be kept in Lisbon. English

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236

merchants, unable to receive payments from Lisbon, will stop

sending cloth there. The result will be that cloth will

become extraordinarily expensive. Though their price has not

gone up in England, they cease to be sent to Lisbon because

their value cannot be recovered. In order to have these

cloths, the Portuguese nobility, and others who cannot do

without them, will offer twice the usual price, but as they

cannot get enough of them without sending money out of

Portugal, the increased price of cloth will become the

profit of any one who, in spite of the prohibition, will

export gold or silver. This will encourage various Jews143

and others to take gold and silver to English vessels in the

port of Lisbon, even at the risk of their lives. At first,

they will gain 50 to 100 percent in this traffic and this

profit is paid by the Portuguese in the high price they give

for the cloth. They will gradually familiarize themselves

with this maneuver, after having often practiced it

successfully, and eventually, money will be put on board

English ships for a payment of one to two percent.

The king of Portugal lays down the law or prohibition.

His subjects, even his courtiers, pay the cost of the risk

run to circumvent and elude it. Therefore, no advantage is

143

Jews were traditionally active in the money and banking trade due to the prohibition of usury imposed

by the Catholic Church in Spain and Portugal.

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237

gained by such a law. On the contrary, it causes a real loss

to Portugal since more of the state’s money is sent abroad

than if there was no such law.

Those who gain by this maneuver, whether Jews or

others, often send their profits abroad, and when they have

enough of them or when they get scared, they often follow

their money abroad.

If some of these lawbreakers were caught in the act,

their goods confiscated and their lives taken, these events,

instead of stopping the export of money, would only increase

it, because those who formerly were satisfied with one or

two percent for exporting money, will ask 20 or 50 percent,

and so the export must always go on to pay the balance.

I do not know whether I have succeeded in making these

reasons clear to those who have no knowledge of trade. I

know that for those who understand exchange rates, nothing

is easier to comprehend, and they are rightly astonished

that those who govern states and administer the finances of

great kingdoms have so little knowledge of the nature of

exchange rates as to forbid the export of bullion and coins

of gold and silver.

The only way to keep them in a state is to conduct

foreign trade so that the balance is not adverse to the

state.

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239

Chapter Four: Of the Variations in the Proportion of Values

with Regard to the Metals Used as Money

Abstract: The price of gold and silver and the

ratio between them is determined by markets and is

also based on their usefulness, cost of

production, and transportation costs. When

government mints establish a fix ratio between

gold and silver money that is not based on market

prices, the overvalued metal will be driven from

circulation. This is commonly referred to as

“Gresham’s Law” where bad money drives out good

money.

If metals were found as easily as water commonly is,

everyone would take what he wanted and they would hardly

have any value. The most abundant metals that cost the least

to produce are also the cheapest. Iron seems the most

necessary, but as it is commonly found in Europe and

produced with less trouble and labor than copper, it is much

cheaper.

Copper, silver, and gold are the three metals generally

used as money. Copper mines are the most abundant and cost

less in land and labor to produce. The richest copper mines

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240

today are in Sweden and more than 80 ounces of copper are

needed there to pay for an ounce of silver. It is also to be

observed that the copper extracted from some mines is more

perfect and lustrous than what is obtained from others. The

copper of Japan and Sweden is brighter than that of England.

That of Spain was, in the time of the Romans, better than

that of Cyprus. But gold and silver, regardless of where

they are extracted, are always of the same perfection when

refined.

The value of copper, as with everything else, is

proportional to the land and labor which enter into its

production. Beside the ordinary uses to which it is put,

like pots and pans, kitchen utensils, locks, etc. copper is

used as money in most states for small purchases. In Sweden

it is even used in large payments when silver is scarce.

During the first five centuries of Rome, it was the only

money. Silver only began to be employed in exchange in the

year [of Rome or AUC144] 484 (269 BC). The ratio of copper to

silver was then rated in the mints at 72 to 1; in the

coinage of 512 (241 BC) at 80 to 1; in 537 (216 BC), 64 to

1; in 586 (167 BC) at 48 to 1; in 663 (90 BC) by Drusus and

672 (81 BC) by Sulla at 53 to 1; in 712 (42 BC) by Marcus

Antonius and 724 (30 BC) by Augustus at 56 to 1; in 54 AD

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under Nero at 60 to 1; in 160 AD under Antoninus at 64 to 1;

in the time of Constantine 330 AD at 120 and 125 to 1; in

the age of Justinian about 550 AD at 100 to 1. Since then,

it has always varied below the ratio of 100 to 1 in the

European mints.145

Today, because copper is only used as money for small

purchases, whether alloyed with carbon to make brass as in

England, or with a small portion of silver as in France and

Germany, it is generally rated in the proportion of 40 to 1,

though the market price of copper to that of silver is

ordinarily at 80 or 100 to 1. The reason is that the cost of

coining is generally deducted from the weight of the copper.

When there is not too much of this small money in

circulation for small transactions in the state, coins of

copper or copper and alloy are used without difficulty in

spite of their defect in intrinsic value. However, when

being used for exchanges with a foreign country, they will

only be taken for the weight of the copper and the silver

alloy. Even in states where there is too much copper in

circulation for small transactions, when the greed or

ignorance of the governors mandate laws that require a

certain amount be received in large payments, it is

144

An alternative dating system which begins with the establishment of Rome in 753 BC. 145

The dates given above which are not followed by AD are in terms of AUC (Anno Urbis conditae) or in

the years of Rome where the year one is 753 BC. Hence the year 484 is 269 BC and the year 724 is 30 BC.

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242

unwillingly accepted. Small coins lose a certain percentage

when traded for silver, as is the case with billon coins and

ardites in Spain,146

or when they are used for large

payments. Yet small coins can always be used without

difficulty for small purchases because the value of the

payments is small and therefore the loss is even smaller.

This is why they are accepted without difficulty, and why

copper is exchanged for small silver coins above the weight

and intrinsic value of copper within a state, but not with

other states, because each state has the wherewithal to

carry on its small exchanges with its own copper coins.

Gold and silver, like copper, have a value proportional

to the land and labor necessary for their production. If the

public assumes the cost of minting these metals, their value

as bars and coins is identical, their market value and their

mint value are the same, and their value in the state and in

foreign countries is always alike, depending on the weight

and fineness; that is on weight alone if the metals are pure

and without alloy.

Silver mines have always been found to be more abundant

than those of gold, but not equally in all countries or at

all times. Several ounces of silver have always been needed

146

Billon coins were small copper coins that were used in France and that were similar to Spain’s ardite

coins.

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to buy one ounce of gold, sometimes more sometimes less,

according to the abundance of these metals and the demand

for them. In the year AUC 310 (443 BC), 13 ounces of silver

were needed in Greece to buy an ounce of gold, i.e. gold was

to silver as 1 to 13; AUC 400 (353 BC) or thereabouts, 1 to

12; AUC 460 (393 BC), 1 to 10 in Greece, Italy, and the

whole of Europe. This ratio of 1 to 10 seems to have

persisted for three centuries to the death of Augustus, AUC

767 or 14 AD. Under Tiberius, gold became scarce or silver

more plentiful, and the ratio gradually rose to 1 to 12, 12

1⁄2, and 13. Under Constantine, 330 AD, and Justinian, 550

AD, it was 1 to 14 2/5. Later history is more obscure. Some

authors think it was 1 to 18 under certain French kings. In

840 AD, under Charles the Bald, gold and silver coins were

struck at 1 to 12. Under St Louis, who died in 1270, the

ratio was 1 to 10; in 1361, 1 to 12; in 1421, over 1 to 11;

in 1500, under 1 to 12; about 1600, 1 to 12; in 1641, 1 to

14; in 1700, 1 to 15; in 1730, 1 to 14 1⁄2.

The quantity of gold and silver brought from Mexico and

Peru in the last century has not only made these metals more

plentiful, but has also increased the value of gold compared

to silver, which has been more abundant, so that in the

Spanish mints, following the market prices, the ratio is

fixed at 1 to 16. The other European states have closely

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244

followed the Spanish price in their mints, some at 1 to 15

7/8, others at 15 3/4, 15 5/8, etc., following the ideas and

views of the directors of the Mints. But since Portugal has

drawn great quantities of gold from Brazil, the ratio has

begun to fall again if not in the Mints at least in the

markets, and this gives a greater value to silver than in

the past. Moreover, a good deal of gold is often brought

from the East Indies in exchange for the silver sent there

from Europe, because the ratio is much lower in India.

In Japan, where abundant silver mines are found, the

ratio of gold to silver is today 1 to 8; in China 1 to 10;

in the other countries this side of the Indies 1 to 11, 1 to

12, 1 to 13, and 1 to 14, as we get nearer to the West and

to Europe. But if the mines of Brazil continue to supply so

much gold, the ratio may eventually fall to 1 to 10, even in

Europe, which seems natural to me, if anything but chance is

the guide for the ratio. When the Roman republic exploited

all the gold and silver mines in Europe, Asia and Africa,

the ratio of 1 to 10 was the most consistent.

If all the gold mines regularly produced a tenth of

what the silver mines produce, the ratio between these two

metals would not necessarily be 1 to 10. The ratio always

depends on the demand and on the market price. Rich people

might prefer to carry gold coins in their pockets rather

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245

than silver, or they might develop a taste for gildings and

gold ornaments rather than silver, thus increasing the

market price of gold.

Neither could the ratio between these metals be

determined by considering the quantity found in a state.

Assume that the ratio is 1 to 10 in England and that the

quantity of gold and silver in circulation is 20 million

ounces of silver and 2 million ounces of gold; that would be

equal to 40 million ounces of silver. Now assume that 1

million ounces of gold are exported from England out of the

2 million, and 10 million ounces of silver are imported in

exchange, there would then be 30 million ounces of silver

and only 1 million ounces of gold, still equivalent in all

to 40 million ounces of silver. If there are 30 million

ounces of silver and 1 million ounces of gold, and if the

quantity of the two metals decided the ratio, it would be 1

to 30, but that is impossible. The ratio in the neighboring

countries is 1 to 10, and it would therefore cost only 10

million ounces of silver, with a little extra for the cost

of transportation, to bring back 1 million ounces of gold to

the state in exchange for 10 million ounces of silver.

Therefore, to determine the ratio between gold and silver,

the market price is alone decisive: the number of those who

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need one metal in exchange for the other, and of those who

are willing to make such an exchange, determines the ratio.

It often depends on the attitudes of men: the bargaining is

done approximately and not geometrically. But, I do not

believe that one can imagine any rule but this one to

determine the ratio. At least we know that in practice, it

is the one which decides, as in the price and value of

everything else. Foreign markets affect the price of gold

and silver more than they do the price of any other goods or

merchandise because nothing is transported with greater ease

and less waste. If there were a free and regular trade

between England and Japan and if a number of ships were

regularly employed in this trade and the balance of trade

were in all respects equal, i.e. if the goods exported from

England to Japan were equal to the goods imported from Japan

in terms of price and value, it would cause gold to be

exported from Japan in exchange for silver, and the ratio

between gold and silver in Japan would be made the same as

it is in England, subject only to the risks of navigation,

because the costs of transportation is assumed here to be

paid by the trade in goods.

Taking the ratio at 1 to 15 in England and 1 to 8 in

Japan, there would be more than 87 percent to gain by

carrying silver from England to Japan and bringing back

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247

gold. But this difference is not enough to pay for the costs

of such a long and difficult voyage. It pays better to bring

back merchandise from Japan rather than gold in exchange for

silver. It is only the costs and risks of the transport of

gold and silver that can make a difference in the ratio

between these metals in different states. In the nearest

state, the ratio will differ very little, with a difference

from one state to another of 1, 2 or 3 percent, but from

England to Japan, the total of all these differences will

amount to more than 87 percent.

It is the market price which decides the ratio of the

value of gold to that of silver. The market price is the

base for this proportion in the value assigned to gold and

silver coins. If the market price varies considerably, the

coinage must be reformed to follow the market rate. If this

is not done, confusion and disorder will emerge because the

price of one or the other metal coins will rise above its

specified monetary value. There are an infinite number of

examples of this in antiquity. There is a quite recent one

in England under the laws made at the London Mint. There an

ounce of silver, eleven-twelfths fine, was worth 5 shillings

2 pence sterling. Since the ratio of gold to silver (which

had been fixed at 1 to 16 in imitation of Spain) has fallen

to 1 to 15 and 1 to 14 1⁄2, an ounce of silver sold at 5

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shillings 6 pence sterling, while the gold guinea continued

to circulate at 21 shillings 6 pence sterling. This caused

the export from England of all the silver crowns, shillings

and sixpences which were not worn by circulation. Silver

money became so scarce in 1728 (only the most worn pieces

remained) that people had to exchange a guinea at a loss of

nearly 5 percent. The trouble and confusion thus produced in

trade and circulation forced the Treasury to request that

the celebrated Sir Isaac Newton, director of the Tower Mint,

make a report on the measures he thought most suitable to

remedy this chaos.

Nothing could have been easier. It only required

following the market price of silver in coining silver at

the Tower. Whereas the ratio of gold to silver was

traditionally by the laws and regulations of the Tower Mint

set at 1 to 15 3⁄4, it was only necessary to make the silver

coins lighter in the proportion of the market price, which

had fallen below 1 to 15, and then to anticipate the changes

which the gold from Brazil would bring in the ratio between

these two metals. It might even have been possible to fix it

on the basis of 1 to 14 1⁄2, as was done in 1725 in France,

and as they will be forced to later do in England.

It is true that the coinage in England might equally

have been adjusted to the market price and ratio by

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249

diminishing the nominal value of gold coins. This was the

policy adopted by Sir Isaac Newton in his report, and by the

Parliament in response to this report. But, as I shall

explain, it was the least natural and the most

disadvantageous policy. Firstly, it was more natural to

raise the price of silver coins, because the public had

already done so in the market. The ounce of silver, which

was worth only 62 pence sterling at the Mint, was worth more

than 65 pence in the market, and all the silver money was

being exported except for the coins that were considerably

reduced in weight due to wear in circulation. On the other

hand, it was less disadvantageous to the English nation to

raise the silver money than to lower the gold money when

considering the sums that England owes to foreigners.

If it is assumed that England owes foreigners 5 million

sterling of capital, invested in the public funds, it may be

equally assumed that foreigners paid this amount in gold at

the rate of 21 shillings 6 pence a guinea or in silver at 65

pence sterling the ounce, according to the market price.

These 5 millions have therefore cost foreigners

4,651,163 guineas, at 21 shillings 6 pence per guinea; but

now that the guinea is reduced to 21 shilling, the capital

to be repaid is 4,761,904 guineas, a loss to England of

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250

110,741 guineas, without counting the loss on the annual

interest paid.

Newton told me in answer to this objection that

according to the fundamental laws of the Kingdom, silver was

the true and only monetary standard and that as such, it

could not be altered.

It is easy to answer that the public has altered this

law by their practice and the price of the market and

therefore, it had ceased to be a law. Under these

circumstances, there was no need to adhere scrupulously to

it to the detriment of the nation and to pay foreigners more

than their due. If gold had not been considered true money,

it would have adjusted to the change, as in Holland and

China where gold is considered merchandise rather than

money. If the silver coins had been raised to their market

price without touching gold, there would have been no loss

to the foreigners, and there would have been plenty of

silver coins in circulation. They would have been coined at

the Mint, whereas now no more will be coined until some new

arrangement is made.

By reducing the value of gold (brought about by

Newton's report from 21 shillings 6 pence to 21 shillings),

an ounce of silver which was sold in the London market

before at 65 pence and 65 1⁄2 pence, only truly sold at 64

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251

pence. But as it was coined at the Tower, an ounce was

valued in the market at 64 pence and if it was taken to the

Tower to be coined, it would be worth no more than 62 pence,

so no more was taken there. A few shillings or fifths of

crowns have been struck at the expense of the South Sea

Company, losing the difference of the market price; but they

disappeared as soon as they were put into circulation.

Today, no silver coins of full mint weight can be seen in

circulation, only worn coins that do not exceed the market

price in weight are circulating.

However, the value of silver continues to rise

imperceptibly in the market. The ounce, which was worth only

64 pence after the reduction of which we have spoken, has

risen again to 65 1⁄2 and 66 in the market; and in order to

have silver coins in circulation and coined at the Tower, it

would be necessary again to reduce the value of the gold

guinea from 21 shillings to 20 shillings and to lose to

foreigners double of what is lost already, unless it is

decided to follow the natural course and to adjust silver

coins to the market price. Only the market price can set the

ratio of the value of gold and silver, as is the case for

all other values. Newton's reduction of the guinea to 21

shillings was designed only to prevent the disappearance of

the light and worn coins which remained in circulation, and

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252

not to fix gold and silver coins on the true ratio of their

price. I mean by their true ratio that which is fixed by

market prices. This price is always the touchstone in these

matters. Its variations are slow enough to allow time to

regulate the mints and prevent disorders in the circulation.

In some centuries, the value of silver rises slowly

against gold, while in others the value of gold rises

against silver. This was the case in the age of Constantine,

who reduced all values to that of gold as the more

permanent. However, the value of silver is generally the

more permanent and gold is more subject to variation.

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Chapter Five: Of the Augmentation and Diminution of the

Denomination of Money

Abstract: Raising and lowering the nominal value

of money is shown not to undermine the theory of

the value of money. In contrast, such measures are

shown to be methods by which the prince acquires

resources by deceiving individuals about the value

of money. The process causes chaos in the market.

According to the principles we have established, the

quantity of money in circulation fixes and determines the

price of everything in a state, taking into account the

speed of circulation.

We often see, however, in the augmentations and

diminutions practiced in France, such strange variations

that it might be assumed that market prices correspond to

the coin’s nominal value rather than to its quantity in

exchange; the quantity of livres tournois in money of

account147

rather than the quantity of marks and ounces, and

this seems directly opposed to our principles.

147

During this time period, they had a money of account and all sorts of money of exchange. Today it

would be like buying a Toyota for $30,000 but paying for it with $30,000 worth of Japanese Yen.

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Assume, as happened in 1714, that the one ounce silver

coin, the ecu, which was valued at 5 livres is lowered by an

order of the king at a rate of one percent per month over a

period of 20 months to a nominal value of 4 livres instead

of 5. Let us see what will be the natural consequences of

this with respect to the genius of the nation.

All those who owe money will quickly pay their debts so

as not to lose by the diminutions. Entrepreneurs and

merchants find it easy to borrow money so that even the

least able and the least credit worthy will expand their

business. They borrow money with what they believe is no

interest and load themselves with merchandise at current

prices. The strength of their demand even causes prices to

rise. These merchants then find they have a hard time

selling their merchandise for money that is losing its

nominal value. They even turn towards foreign merchandise

and import considerable quantities of it for the consumption

of several years. All this causes money to circulate more

rapidly and raises the price of everything. Then, high

prices prevent the foreigner from importing merchandise from

France as usual. France keeps her own merchandise and at the

same time imports great quantities. This double operation is

the reason why considerable amounts of specie must be sent

abroad to pay the balance.

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255

The exchange rates never fail to show this

disadvantage. Exchange rates are commonly seen at six and

ten percent against France during these diminutions.

Informed people in France hoard their money during these

times. The king finds means to borrow a large amount of

money on which he willingly loses from the diminution

because he plans to compensate himself by an augmentation at

the end of the diminutions.

To this end, after several diminutions, they begin to

hoard money in the king's treasury by postponing payments,

pensions, and army pay. In these circumstances, money

becomes extremely rare at the end of the diminutions both

because of the sums hoarded by the king and various

individuals, and because the nominal value of the coin is

diminished. The amounts sent abroad also contribute greatly

to the scarcity of money, and this scarcity gradually

reduces the prices of the merchandise (which entrepreneurs

had stock up on) by 50 or 60 percent below the prices

prevailing at the time of the first diminutions. Circulation

[i.e. the economy] falls into convulsions. Hardly enough

money can be found to send to market. Many entrepreneurs and

merchants go bankrupt and their merchandise is sold at

bargain prices.

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256

Then the king increases anew the coinage, setting the

new ecu, or new issue of one ounce silver coins, equal to 5

livres, and begins to use this new coinage to pay the troops

and the pensions. The old coins are taken out of circulation

and received at the mint at a lower nominal value and

therefore the king profits by the difference.

But all the sums of new coinage that come from the mint

do not restore the abundance of money in circulation. The

amounts kept hoarded by individuals and those sent abroad

greatly exceed the nominal increase on the coinage that

comes from the mint.

The cheapness of goods in France begins to draw in

money from foreigners, who find them 50 or 60 or more

percent cheaper, so gold and silver are sent to France to

buy them. In this way the foreigner who sends his bullion to

the mint easily recoups the fees paid at the mint. He finds

the double advantage of the low price of the goods he buys,

and the loss of the mint charge really falls on the French

in the sale of their goods to the foreigners. They have

enough merchandise for several years' consumption. They

resell to the Dutch, for example, the spices which they

bought from them for two thirds of what they paid. All this

takes place gradually, and the foreigner decides to buy

these goods from France only because of their cheapness. The

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257

balance of trade, which was against France at the time of

the diminutions, turns in her favor at the time of the

augmentation, and the king is able to profit by 20 percent

or more on all the bullion brought into France and taken to

the mint. As foreigners now owe a trade balance to France

and do not have in their country coins of the new issue,

they must take their bullion and coins of the old issue to

the mint to obtain new coins for payment. But this trade

balance, which foreigners owe to France, arises only from

the goods that they import from it at low prices.

France is all round the dupe of these operations. She

pays very high prices for foreign goods during the

diminutions and sells them back to the same foreigners at

very low prices at the time of the augmentation. She sells

her own merchandise at low prices, which she had kept so

high during the diminutions, and so it would be difficult

for all the money which left France during the diminutions

to come back during the augmentation. If coins of the new

issue are counterfeited abroad, as is nearly always the

case, France loses the 20 percent which the king has

established as the mint charge. The gain goes again to the

foreigner, who also profits by the low prices of goods in

France.

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258

The king makes a considerable profit by the mint tax,

but it costs France three times as much to enable him to

make this profit.

It is well understood that when there is a current

balance of trade in favor of France against the foreigner,

the king is able to raise a tax of 20 percent or more by a

new coinage and an increase in the nominal value of coins.

But if the trade balance was against France at the time of

this new coinage and augmentation, the operation would have

no success and the king would not derive a great profit from

it. The reason is that in this case, it is necessary to

continually send money abroad. But the old ecu is as good as

the new in foreign countries. That being so, Jews and

bankers will give a premium or bonus in secret for the old

coins and the individual who can sell them above the mint

price will not take them there. At the mint they give him

only about 4 livres for his ecu, but the banker will give

him at first 4 livres 5 sols, and then 4 livres 10, and at

last 4 livres 15. And this is how it may happen that an

augmentation of the coinage may lack success. It can hardly

happen when the augmentation is made after the diminutions

indicated, because then the balance naturally turns in favor

of France, as we have explained.

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259

The experience of the augmentation of 1726 may serve to

confirm all this. The diminutions that had preceded this

augmentation were made suddenly and without warning, which

prevented the ordinary operations of diminutions. This

prevented the trade balance from turning strongly in favor

of France at the augmentation of 1726. Few people took their

old coins to the mint, and the profit of the mint tax, which

was in view, had to be abandoned.

It is not within my subject to explain the reasoning of

public administrators for lowering the coinage suddenly, nor

the reasons that deceived them in their project of the

augmentation of 1726. I have mentioned the increases and

decreases in France only because their results seem to

sometimes clash with the principles I have established in

that the abundance or scarcity of money in a state raises or

lowers all prices proportionally.

After explaining the effects of lowering and raising

the coinage, as practiced in France, I maintain that they

neither destroy nor weaken my principles. If I am told that

what cost 20 livres or 5 ounces of silver before the

lowering described above does not even cost 4 ounces or 20

livres of the new money after the augmentation, I will

assent to this without departing from my principles because,

as I have just explained, there is less money in circulation

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260

than there was before the diminutions. The difficulties of

exchange during the times of these operations cause

variations in the prices of things and the interest rate on

money which cannot be taken as a rule in the ordinary

principles of circulation and exchange.

The change in the nominal value of money has always

been brought about by some disaster or famine in the state,

or by the ambition of some prince or individuals. In the

year 157 AUC (596 BC), Solon increased the nominal value of

the drachma of Athens after a sedition and abolition of

debt. Between 490 and 512 AUC (263-241 BC), the Roman

Republic increased the nominal value of its copper coins

several times, so that their “as” [i.e. coin] came to be

worth six. The pretext was to provide for the needs of the

state and to pay the debts incurred in the first Punic War.

This did not fail to cause great confusion. In 663 AUC (90

BC), Livius Drusus, Tribune of the people, increased the

nominal value of coins by one-eighth, reducing its

fineness148

by the same, which gave counterfeiters an

occasion to introduce confusion into the economy. In 712 AUC

(41 BC), Mark Antony increased the nominal of silver by 5

percent by mixing iron with the silver in order to meet the

148

Fineness refers to purity or the percentage of precious metal (i.e. gold or silver) in the coin. So here

Cantillon is referring to debasement.

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261

needs of the Triumvirate.149

Many Emperors subsequently

debased or increased the nominal value of their coins. The

kings of France at different times have done likewise. This

is why the livre tournois, which was once worth one pound of

silver, has sunk to so little value. These proceedings have

never failed to cause disorder in states. The nominal value

of coins matters little or not at all provided it be

permanent. The pistole of Spain is worth 9 livres or florins

in Holland, about 18 livres in France, 37 livres 10 sols in

Venice, 50 livres in Parma. Values are exchanged between

these different countries in the same proportion. The price

of everything increases gradually when the nominal value of

coins increases. The actual quantity in terms of weight and

fineness of the coins is the base and regulator of values,

taking into account the rapidity of circulation. A state

neither gains nor loses by the raising or lowering [of the

nominal value] of these coins so long as it keeps the

quantity of them the same, though individuals may gain or

lose depending on their circumstances. People are full of

false prejudices and misconceptions about the nominal value

of their coins. We have shown in the chapter on exchanges

that the price and fineness of the coins of different

149

The Triumvirate represented the government established in 43 BC where the Empire was divided

between Mark Anthony, Octavian, and Lepidus

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262

countries, marc for marc and ounce for ounce, is what

ultimately rules. If an increase or decrease of the nominal

value changes this rule for a time in France, it only causes

a temporary crisis or time of difficulty in trade. It always

returns, little by little, to intrinsic values, on which

prices are necessarily established, both in the market and

in foreign trade.

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Chapter Six: Of Banks and their Credit

Abstract: Fractional reserve banking is a system

where the banks lend some of its deposits and earn

interest. This increases the amount of money in

circulation compared to warehouse or 100% reserve

banking. This utility of banking comes at the risk

of being unable to withdraw your deposits. The

amount that can be lent into circulation depends

on the type of bank and the needs of the

depositors. There are goldsmith-bankers, the

typical banker who issues banknotes, and the

national bank.

If one hundred thrifty gentlemen or property owners who

save money every year to occasionally buy land deposit

10,000 ounces of silver with a goldsmith or banker in

London, they will receive in return notes payable on demand.

They do this to avoid the trouble of keeping this money in

their houses and to prevent thefts. They will often leave

their money there for a long time, and when they make a

purchase, they will notify the banker some time in advance

to have their money ready when the formalities and legal

documents are complete.

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264

In these circumstances, the banker will often be able

to lend throughout the year 90,000 ounces of the 100,000150

he owes and will only need to keep on hand 10,000 ounces to

meet all the withdrawals. He deals with wealthy and

economical persons; so as fast as one thousand ounces is

demanded of him from one hand, another thousand is brought

to him from another hand. It is enough, as a rule, for him

to keep on hand one tenth of his deposits. There have been

examples and experiences of this in London. Instead of the

individuals in question keeping on hand the greatest part of

100,000 ounces all year round, the custom of depositing it

with a banker causes 90,000 ounces of the 100,000 to be put

back into circulation. This is the primary idea one can

derive regarding the utility of this sort of bank. The

bankers or goldsmiths contribute to the acceleration of the

circulation of money. They lend it out at interest at their

own risk and peril, and yet they are, or ought to be, always

ready to cash their notes when on demand.

If an individual needs to pay 1,000 ounces to another,

he will give him a banker's note for that amount. This other

person will perhaps not demand the money of the banker. He

will keep the note and later give it to a third person in

150

This is a calculation error. One hundred people depositing 10,000 ounces would result in 1,000,000 in

deposits. This is probably a manuscript calculation error and it might be that they deposited 1,000 ounces,

rather than 10,000.

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265

payment, and this note may pass through several hands for

large payments and for a long time without any one demanding

the money from the banker. It will be only someone who does

not have complete confidence, or someone who has several

small sums to pay who will demand the money. In this first

example, the cash reserve of a banker is only one tenth of

his business.

If 100 individuals or property owners deposit their

income with a banker every six months as it is received, and

then demand their money back when they have a need to spend

it, the banker will be in a position to lend much more of

the money that he owes and receives at the beginning of the

half years, for a short term of some months, than he will be

towards the end of these periods. And his experience with

the conduct of his clients will teach him that he can hardly

lend during the whole year more than about one half of the

sums that he owes. Bankers of this kind will see their

credit ruined if they fail for one instant to redeem the

notes on their first presentation. When they are short of

cash on hand, they will give anything to obtain money

immediately. That is to say, they will pay a much higher

interest than they receive on the sums they have lent.

Hence, they make it a rule based on their experience to

always keep enough money on hand to meet demands, and more

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266

rather than less. Many bankers of this kind (and they are

the greatest in number) always keep on hand half the amounts

deposited with them and lend the other half at interest and

put it into circulation. In this second example, the banker

causes his notes of 100,000 ounces or écus to circulate with

50,000 écus.151

If he has a great flow of deposits and great credit, it

increases confidence in his notes, and makes people less

eager to cash them. However, it only delays his payments a

few days or weeks or until the notes fall into the hands of

persons who are not accustomed to dealing with him. He ought

to always manage his business according to the practices of

those who are accustomed to entrust their money to him. If

his notes fall into the hands of those in his own business

[i.e. banking], they will immediately want to withdraw the

money from him.

If those who deposit money with the banker are

entrepreneurs and merchants who regularly deposit large sums

and soon thereafter draw them out, it will likely be the

case that if the banker diverts more than one third of his

cash he will find it difficult to meet these demands.

151

This banker causes 100,000 in notes and 50,000 in silver to circulate while keeping 50,000 in silver on

reserve at the bank to redeem deposits. This is the first step in what is now know as the money multiplier

process. If the 50,000 of silver put into circulation were actually redeposited in other banks and all these

banks kept 50% reserves the money multiplier would be two and ultimately the money supply could be

brought to a total of 200,000 from the original 100,000 deposited.

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267

It is easy to understand by these examples that the

sums of money which a goldsmith or a banker can lend at

interest or divert from his cash are naturally proportional

to the practices and conduct of his clients. While we have

seen bankers who were safe with a cash reserve of one-tenth,

others must keep nearly one half or even two-thirds, though

their credit might be as good as that of the first.

Some trust one banker, some another. The most fortunate

is the banker whose clients are rich gentlemen looking for a

safe place for their money without wishing to invest it at

interest while they wait.

A general national bank has this advantage over the

bank of a single goldsmith because there is always more

confidence in it. The largest deposits are willingly brought

to it, even from the most remote quarters of the city, and

this generally leaves small bankers with only the deposits

of petty sums from their neighborhood. Even the revenues of

the State are deposited in it in countries where the prince

is not absolute. And this, far from injuring credit and

confidence in it, only serves to increase them.

If payments in a national bank are made by transfers or

book credits, the advantage is that they are not subject to

forgeries. But if the bank issues notes, false notes may be

made and cause chaos. There will also be a disadvantage for

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268

those in the city who live far from the bank and who would

rather pay and receive in money and not travel to the bank.

This is especially so for those who live in the country. But

if the bank notes are dispersed, they can be used near and

far. In the national banks of Venice and Amsterdam, payment

is only made in book credits, but in the one in London, it

is made in credit, in notes, and in money, according to

individual preferences. Today, London is the strongest bank.

Therefore, it should be understood that the advantage

of all banks in a city, public or private, is to accelerate

the circulation of money and to prevent so much of it from

being hoarded, as it would naturally be for long time

intervals.152

152

The final three chapters of the Essai are a thinly-veiled attack on John Law and the

Mississippi Company. Cantillon first shows that banks, including national banks, have

some utility in accelerating the circulation of money. The mercantilists often thought that

banks decreased circulation and that banks hurt the economy. Ultimately, Cantillon

concludes that national banks, such as Law’s, were of little utility in a large country like

France and would ultimately be very harmful.

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269

Chapter Seven

Further Explanations and Enquiries as to the Utility of a

National Bank

Abstract: National Banks are of little utility and

can be the source of economic chaos. The increase

in the supply of money that they provide is

relatively small and offers the same disadvantages

as increases in real money. They are therefore

unnecessary and potentially very harmful, as in

the cases of the Bank of Venice and the Bank of

London. The role of legal tender laws, fractional

reserve banking, and regional trade fairs are

described.

It is of little importance to examine why the Bank of Venice

and that of Amsterdam keep their books in moneys of account

different from current [i.e. silver coin] money, and why

there is always a fee for converting these book credits into

currency. It is not a point of any usefulness for

circulation. The Bank of London has not followed them in

this regard. Its accounts, notes, and payments are made and

are kept in current coins, which seem to me more uniform,

more natural and no less useful.

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270

I have not been able to obtain accurate information

about the quantities of money ordinarily brought to these

banks, nor the amount of their notes and accounts, loans,

and sums kept as reserve. Someone who is better informed on

these points will be better able to discuss them.

However, I know fairly well that these sums are not as

large as commonly assumed, so I will briefly discuss the

subject.

Assume that the bills and notes of the Bank of London,

which seems to me the most considerable, amount to a weekly

average of four million ounces of silver or about one

million sterling. If they regularly keep a quarter or

£250,000 sterling or one million ounces of silver in coins

in reserve, the utility of this bank to the circulation

corresponds to an increase of the money of the state of

three million ounces or £750,000 sterling, which is without

doubt a very large sum and of very great utility for the

circulation when it needs to be accelerated. However, I have

noted elsewhere [e.g. part 2, chapter 8] that there are

cases where it is better for the welfare of the state to

slow down the circulation rather than to accelerate it. I

have heard that the notes and bills of the Bank of London

have risen in some cases to two millions sterling, but it

seems to me this can only have been by extraordinary

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271

accident. And I think the utility of this bank corresponds

in general to only about one-tenth of all the money in

circulation in England.

If the general explanations I received in 1719 about

the revenues of the Bank of Venice are correct, it may be

said that the utility of national banks generally does not

match one-tenth of the money circulating in a state. This is

more or less what I’ve learned.

` The revenues of the state in Venice may amount annually

to four million ounces of silver, which must be paid in

banknotes, and the collectors hired for that purpose, who

receive money at Bergamo and in the most distant places for

taxes, have to change it into banknotes when they make the

payments to the republic.

In Venice, all payments for negotiations—purchases and

sales above a certain modest sum—must, by law, be made in

banknotes. Therefore, all the retailers who have collected

money in their business are compelled to buy banknotes to

make large payments. Those who need money for their expenses

or retail purchases have to sell their banknotes for money.

The sellers and buyers of banknotes are usually equal

when the total of all the credits or accounts on the bank’s

books do not exceed the value of approximately 800,000

ounces of silver.

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272

Time and experience (according to my informant)

provided this knowledge to the Venetians. When the bank was

first set up, individuals brought their money there to have

credit at the bank for the same value. The money that was

deposited at the bank was later spent on the needs of the

republic [i.e. the government] and yet, banknotes preserved

their original value because there were as many people

needing to buy them as those needing to sell them. Finally,

the state, in need of money, gave credits to war contractors

in banknotes instead of silver, doubling the amount of its

credits.

Then with the number of sellers of banknotes being much

greater than number of buyers, the notes began to lose value

and fell twenty percent against silver. By this discredit,

the revenue of the republic fell by one-fifth and the only

remedy found for this chaos was to pledge part of the

state’s revenues to borrow banknotes at interest. With these

loans of banknotes half of them were cancelled and then with

the sellers and buyers being about equal, the bank regained

its original credit and the total of banknotes was brought

back to 800,000 ounces of silver.

In this manner, it has been ascertained that the

usefulness of the Bank of Venice, in terms of money in

circulation, corresponds to about 800,000 ounces of silver.

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273

If we assume that all the money in the states of that

republic amount to eight million ounces of silver, the

usefulness of the bank corresponds to one-tenth of that

silver.

A national bank in the capital of a great kingdom or

state must, it seems, contribute less to the circulation

than one in a small state because of its distance from the

provinces. When money circulates in greater abundance than

among its neighbors, a national bank does more harm than

good. An abundance of fictitious and imaginary money causes

the same disadvantages as an increase of real money in

circulation, by raising the price of land and labor, or by

changing the value of money and goods only to cause

subsequent losses. This furtive or unnatural abundance

vanishes at the first gust of scandal and precipitates

economic chaos.

Towards the middle of the reign of Louis XIV [1638-

1715], there was more money in circulation in France than in

neighboring countries, and the king's revenue was collected

without the help of a bank, as easily and conveniently as it

is collected today in England with the help of the Bank of

London.

If exchanges in Lyons during one of its four trading

fairs amounted to 80 millions of livres, and if they are

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274

begun and finished with one million in cash money, they are

certainly of great convenience. Because everyone is in the

same location, an infinite number of transactions can take

place and it saves the expense of transporting silver from

one place to the other. Normally, it might take three months

for this same million of cash to conduct 80 million in

payments.

The Paris bankers have often observed that the same bag

of money has come back to them four or five times in the

same day when they had a good deal to pay out and receive.

I think that public banks are useful in small states

and in those where silver is rather scarce, but of little

utility in giving a solid advantage to a large state.

The emperor Tiberius, a strict and economical leader,

saved 2.7 billion sesterces, equal to 25 million sterling or

100 million ounces of silver in the imperial treasury. This

was an enormous sum for those times and even for today. It

is true that in tying up so much money, he disturbed the

circulation and silver became scarcer in Rome than it had

ever been.

Tiberius, who attributed this scarcity to the monopoly

of contractors and financiers who farmed the empire revenues

[i.e. private tax collectors], ordered by an edict that they

should buy land with at least two thirds of their capital.

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275

Instead of stimulating the circulation of money, his edict

threw it completely into chaos. All the financiers hoarded

and called in their capital under the pretext of putting

themselves into a position to obey the edict by buying land,

which instead of rising in value, sunk to a much lower price

owing to the scarcity of silver in circulation. Tiberius

remedied this scarcity by lending to individuals on good

security, but only 300 million sesterces, or one-ninth of

the money he had in his treasury.

If the ninth part of the treasury sufficed in Rome to

re-establish the circulation, it would seem that the

establishment of a general bank in a great kingdom where its

utility would never correspond to one-tenth of the money in

circulation, when it is not hoarded, would be of no real and

permanent advantage, and when considered for its intrinsic

value, it can only be regarded as a mean for saving time.

However, a real increase in the quantity of circulating

money is of a different nature. We have covered this before

[in part 2, chapter 6] and Tiberius’ treasury gives us

another opportunity to touch the subject. This treasure of

2.7 billion of sesterces, left at the death of Tiberius, was

squandered by his successor, emperor Caligula, in less than

a year. Money was never seen so abundant in Rome. What was

the result? All this money plunged the Romans into luxury

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276

and into all sorts of crimes to pay for it. More than

600,000 pounds sterling left the empire every year to buy

merchandise from the Indies, and in less than 30 years, the

empire grew poor and silver became very scarce, without the

loss of a single province.

Though I consider that a general bank is not of great

utility in a large state, I allow that there are

circumstances in which a bank may have effects that seem

astonishing.

In a city where there are public debts for considerable

amounts, the presence of a bank enables one to buy and sell

capital stock in an instant, and for enormous sums, without

causing any disturbance in the circulation. In London, if a

person sells his South Sea stock to buy stock in the bank153

or in the East India Company, or hoping that in a short time

he will be able to buy at a lower price stock in the same

South Sea Company, he always takes banknotes, and will

generally not ask for money in exchange for these notes,

except for the value of the interest. Capital is hardly ever

spent so there is no need to change it into coins, but one

does need to ask the bank for money to live on because cash

is needed for small transactions.

153

He is referring to the Bank of London, now the Bank of England.

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277

If a property owner who has 1000 ounces of silver pays

200 ounces for the ownership of public stock to earn

interest and spends 800 ounces for himself, the thousand

ounces will always require coins. This owner will spend 800

ounces and the owners of the stocks will spend 200 of them.

But when these owners are in the habit of speculating—buying

and selling public stocks—no silver is needed for these

operations and banknotes suffice. If it were necessary to

draw cash out of circulation to be used in these purchases

and sales, it would amount to a great sum and would often

impede the circulation, and if this were the case, stocks

could not be sold and bought so often.

The origin of this capital is money that is deposited

in the bank and is rarely drawn out, such as when an owner

of capital engages in transactions and needs cash. This

explains why the bank keeps in reserve only one-fourth or

one-sixth of the silver against which it issues notes. If

the bank did not have the funds of this type of capital, it

would, in the ordinary course of circulation, find itself

compelled, like private banks, to keep half its deposits on

hand to be solvent. It is true that we cannot determine from

the bank books and from its operations the quantity of

capital that passes through several hands in the sales and

purchases made in Change Alley. These notes are often

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278

renewed at the bank and changed against others in purchases.

But the experience of stock purchases and sales clearly

shows that the quantity is considerable, and without these

purchases and sales, the sums deposited at the bank would

likely be smaller.

This means that when a state is not in debt, and has no

need of purchases and sales of stock, the assistance of a

bank will be less necessary and less important.

In 1720, the capital of public stock of enterprises of

private companies in London, which were bubbles and scams,

rose to the value of 800 million sterling. Yet, purchases

and sales of such venomous stocks were carried out without

difficulty by the quantity of notes of all kinds that were

issued and the same paper money was accepted in payment of

interest. However, as soon as the idea of great fortunes

induced many individuals to increase their expenses, to buy

carriages or foreign linen and silk, cash was needed for all

that, i.e. for the spending of interest, and this broke all

the systems up in pieces.

This example shows that the paper and credit of public

and private banks may cause surprising results in everything

which does not concern ordinary expenditure for drink, food,

clothing, and other family requirements. In the regular

course of the circulation, the help of banks and credit of

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279

this kind is much smaller and less solid than is generally

assumed. Silver alone is the true lifeblood of circulation

[i.e. the economy].

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280

Chapter Eight

Of the Refinements of Credit of General Banks

Abstract: When the government’s national bank

inflates the money supply by increasing the supply

of banknotes, it reduces the rate of interest and

can increase the price of stocks. This is a

corrupt process and when the notes are redeemed,

the price of stocks falls and can result in bank

runs and economic chaos. This is now known as the

business cycle.

The national Bank of London is composed of a large number of

shareholders who elect a board of directors to govern its

operations. Their main task consisted in making a yearly

distribution of the profits from interest on the money lent

against the bank deposits. Later, the public debt was

incorporated with it, on which the State pays interest

annually.

In spite of such a solid foundation, once the bank had

made large advances to the State and the holders of notes

were apprehensive that the bank was in difficulties, a run

on the bank took place and holders of notes went in crowds

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281

to withdraw money. The same thing happened during the

collapse of the South Sea Company in 1720.

The refinements introduced to support the bank and limit

its discredit were first to set up a number of clerks to

count out the money to those bringing in notes, to pay out

large amounts in sixpences and shillings to gain time,154 and

to pay some portion to individual holders who had been

waiting all day to be paid. However, the most considerable

sums were paid to friends who took them away and secretly

brought them back to the bank only to repeat the same

maneuver the next day. In this way, the bank saved its

appearance and gained time until the panic abated. But when

this did not suffice, the bank opened a stock subscription,

engaging trusty and solvent people to join as guarantors of

large amounts, in order to maintain the credit and

circulation of the bank notes.

It was by this last refinement that the credit of the

bank was maintained in 1720 when the South Sea Company

collapsed. As soon as it was publicly known that wealthy and

powerful people were on the subscription list, the run on

the bank ceased and deposits were brought in as usual.

154

The bank was essentially redeeming its notes with small change in order to delay and discourage

redemption.

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282

If a Minister of State in England,155 seeking to lower

the interest rate, or for other reasons, increases the price

of public stock in London, and if he has enough credit with

the directors of the bank to get them to issue a quantity of

banknotes without backing (under the obligation of

indemnifying them in case of loss), begging them to use

these notes to buy several blocks of shares of public stock,

this stock’s price will increase due to these operations.

And those who have sold stock, seeing that high prices

continue, will perhaps decide to buy it back at a higher

price than they sold it for, so as not to leave their

banknotes idle and believing rumors that the interest rate

will fall and that the stock’s price will rise further. If

several people imitate the agents of the banks and buy this

stock, hoping to profit like them, the public funds will

increase in price to the point that the minister wishes. And

it may be that the bank will cleverly resell at a higher

price all the stock purchased at the minister's request, and

will not only make a large profit on it, but will retire and

cancel all the extraordinary banknotes that were issued.

If the bank alone makes the price of public stock rise

by buying it, it will make it fall when it sells it in order

155

Cantillon is probably referring to Robert Walpole who was in the English cabinet at the time and who

would become, in the wake of the scandal, the First Lord of the Treasury, Chancellor of the Exchequer and

Leader of the House of Commons. He was the first ―Prime Minister‖ of England.

Saucier/Thornton

283

to cancel its extraordinary notes. However, many individuals

usually follow the agents of the bank in their operations

and contribute in keeping the price high. Some of them get

caught because they do not understand these operations, in

which are found infinite refinements or rather trickery,

which lie outside my subject.

It is then evident that a bank, with the complicity of a

public administrator, is able to raise and support the price

of public stock, and to lower the rate of interest in the

state at the pleasure of this administrator. When the steps

are taken discreetly, it can pay off the state’s debt. But

these refinements, which open the door to making large

fortunes, are rarely carried out for the sole advantage of

the state, and those who take part in them are generally

corrupted. The excess banknotes, made and issued on these

occasions, do not upset the circulation because they are

used for the buying and selling of stock. They are not used

for household expenses and are not exchanged into silver.

But if some panic or unforeseen crisis drove note holders to

demand silver from the bank, the bomb would burst and it

would be seen that these are dangerous operations.